Sanctions and Anti-Money Laundering Bill [Lords] (Sixth sitting)
John Glen Excerpts(8 years ago)
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The Economic Secretary to the Treasury (John Glen)
May I say what a pleasure it is to serve under your chairmanship once again, Dame Cheryl? I acknowledge that the amendment seeks to set in legislation an obligation on the Government to implement, within 12 months of Royal Assent, our commitment to establish a public register of company beneficial ownership information for foreign companies that already own or buy property in the UK or who bid on UK central Government contracts. It puts an accelerated timetable on something that the Government are doing anyway. In the next few minutes, I will remind the Committee of the timetable to which the Government are committed for delivery of this policy. I will set out the challenges and complexities of the policy and demonstrate why setting an early and artificial deadline for implementation would inadvertently undermine its aims. I know that these are supported across the House, so it is important to ensure that we get the detail of the policy right.
In listening to the remarks made by the hon. Member for Bishop Auckland, I acknowledge the frustration around this; but this Government are committed to continue to lead by example and improve corporate transparency. Over the past five years, the reforms delivered by the Department for Business, Energy and Industrial Strategy have made the UK a global leader on corporate transparency issues. We were the first country in the G20 to establish a fully and publicly accessible company beneficial ownership register and, across the world, non-governmental organisations lobby their Governments to follow the UK example. There is a reason we have that world-leading reputation: it is because of the quality of the measures we have passed and it is a reputation we would lose if this measure were accepted. A 12-month timetable to draft and pass primary and secondary legislation, empower the responsible agencies and commence the obligations is not realistic. The rush to meet such an unrealistic deadline would inevitably lead to loopholes that would be readily exploited by those seeking to evade the new requirements.
Alex Norris
We are not just talking about a 12-month timetable; this was first announced by a Conservative Prime Minister in 2015. What have Ministers been doing since then?
John Glen
I will come on to explain the history of this and why we are where we are. I am happy for the hon. Gentleman to intervene if he does not feel satisfied at the end of that.
Mindful that the eyes of the world are on us, hon. Members should recognise that this legislation would be a world first. Successful delivery raises significant challenges and it is right that the Government achieve the right balance in an effective regime with robust enforcement that does not have a negative impact on land registration processes across the UK. I acknowledge that some have accused the Government—and we have also been accused this afternoon—of not acting swiftly enough to implement this policy. Let me address those concerns.
We have committed to publishing a draft Bill before the summer to introduce the Bill early in the second Session and for the register to be operational in 2021. Publishing a Bill in draft is the right approach. As I said before, this register will be the first of its kind in the world, it will affect people’s property rights, including not just new purchasers but existing owners. This is a sensitive and delicate area. Getting it wrong would have significant adverse consequences.
Anneliese Dodds
The Minister is being generous. He has kindly set out for us a three-year timetable, adding on a couple of years before that when Government committed to this. Is he aware of the Private Eye map, which has been in existence for some time? Through civil society and journalistic activity, Land Registry and Companies House data were put together and a map produced. That appears to have been done quite quickly.
John Glen
I am not familiar with that particular map but I would be very happy to examine it. For clarity, and addressing the hon. Lady’s previous point, the register will capture the details of beneficial owners of all non-UK companies—including those in the overseas territories—that own UK property. This will be a world first, so we are moving as fast as possible, ensuring that the register is as comprehensive as possible.
As the Government set out in last year’s call for evidence, for the register to be effective the sanctions to be applied for non-compliance must be a meaningful deterrent. Enforcement must be energetic. Simple criminal sanctions may not be sufficient in isolation. The draft Bill will include enforcement through land registration law. Where an overseas entity buys property, it will never be able to obtain legal title to that property without having complied with the register’s requirements. Similarly, a restriction on the title register for property owned by an overseas entity will signal to third parties that the overseas entity must comply with the regime before selling the property, creating a long lease or legal charge. Those are significant steps on which it is right to consult.
Hon. Members will recognise that there are separate Land Registries in Scotland and Northern Ireland, as well as the Land Registry for England and Wales. The approaches taken to land registration and overseas entities by each of those Land Registries have been different until now. That too will need be streamlined. Delivery of an holistic outcome that complements all three land registration regimes is an exercise touching multiple teams across Government and the Land Registries. Put simply, it is an exercise that will take time to get right and a further demonstration of why publishing the legislation in draft is the appropriate next step if we are to get it right. Although I appreciate that the motive underlying the new clause supports the policy as a whole and demonstrates a desire for early delivery and implementation, it does not take account of the complexities that I have set out or the challenges of delivery and implementation.
The register will further demonstrate the Government’s commitment to combating money laundering through the property market. Hon. Members will have seen recent press reports—the hon. Member for Bishop Auckland drew our attention to the splash on 3 February—that two unexplained wealth orders have been obtained by the National Crime Agency in connection with two properties worth £22 million.
Those are the first orders obtained under the relevant powers conferred by the Criminal Finances Act 2017, which commenced at the end of January. They were obtained only a few days after it came into effect. As the Minister for Security and Economic Crime has said, the orders are an important addition to the UK’s ability to tackle illicit finance, and it is great to see them already in use.
The Government will continue to take action. BEIS’s response to last year’s call for evidence will be published shortly, and it will set out the Government’s approach to areas of particular complexity. BEIS has already made significant progress in preparing draft legislation; the work with the office of the parliamentary counsel to draft the Bill is under way.
Separately, BEIS is working to quantify the impact of the legislation on the UK. The impact assessment will quantify the register’s potential impact on the property market and investment flows, around which foreign direct investment is very specific, to pick up on the point made by the hon. Member for Bishop Auckland. The register will rightly make the UK more hostile to illicit flows of money, but we must understand the potential impact of legitimate inward investment.
All those issues were considered in last year’s call for evidence. Scrutiny of the draft Bill will further stress-test whether it will be effective. I hope that that process demonstrates the Government’s continued commitment to enact the policy, and our commitment to get it right. For those reasons, I hope that the hon. Lady will withdraw the new clause.
Richard Benyon (Newbury) (Con)
I think it is worth saying for the record that there is a chill wind blowing through the financial lives of some of the people who have used our economy, particularly our property sector, for nefarious purposes and money laundering. From my conversations with a current Security Minister, and from what I know the Government are doing to implement the asset freeze legislation, I have no doubt that that is being taken forward aggressively and in a determined way. That is being recognised abroad; it is certainly being recognised by some of those people who have used the ability of our economy, through good title deeds, to make property a means by which to bury nefarious funds.
We are talking about legislation to hold future Governments to account. I entirely accept my hon. Friend the Economic Secretary’s assertion that this a complex situation to get right. I would like a little more clarification, and I am prepared to cut him some slack on this because if this is not done properly, it will be exploited and people will be able to move wealth in a globalised economy in a much freer way. It should be tied down in a way that encourages people still to invest in this country. I welcome the fact that people want to invest in our property, whether commercial or residential, but not, as the hon. Member Bishop Auckland says, just to leave homes empty. I recognise that that is a real issue, but there is the sheer importance of making sure that all of the provisions are correct. I know it has been complicated: in the asset freeze legislation, there was institutional resistance to what are called Magnitsky-lite measures that were introduced. In a classic piece of good ministerial play, the Government faced down those institutional problems that existed in parts of the civil service and elsewhere and took that forward. To their credit, they are now implementing the measures. I would just like some more assurance from my hon. Friend that this complexity will be tackled with urgency.
John Glen
I am grateful to my right hon. Friend the Member for Newbury and to the Member for Nottingham North for their further observations. I understand the sentiments of frustration and impatience with the Government on this matter. I hope I have spelled out in some detail—in the areas of land registration; alignment around the different parts of the United Kingdom; and making sure that the penalties are appropriate and that the enforcement measures are set to meet the challenge—that the Government have bold ambitions to get this right and to be a world leader in this area. I acknowledge that this has taken rather longer than it would have done in ideal circumstances, but I can confirm and reiterate to my right hon. Friend that the Government are fully committed to delivering this as soon as possible, and that there is a commitment across multiple Departments and the ministerial team to ensure that this reflects the bold aspirations that we have as a nation. I hope that that would be sufficient for us to move on.
Helen Goodman
Ministers have heard that this is an issue of significant concern, and interest in making speedy progress has been expressed on both sides. We will return to this on Report and, that being the case, I do not intend to press it to a vote. I beg to move that the clause be withdrawn.
Clause, by leave, withdrawn.
New Clause 6
Alignment of sanctions
(1) It shall be a negotiating objective of Her Majesty’s Government in negotiations on the matters specified in subsection (2) to continue the United Kingdom’s participation in the Political and Security Committee of the European Union in order to align sanctions policy with the European Union.
(2) Those matters are—
(a) the United Kingdom’s withdrawal from the European Union, and
(b) a permanent agreement with the European Union for a period subsequent to the transitional period after the United Kingdom’s withdrawal from the European Union.
(3) It shall be the duty of the Secretary of State to lay a report before both Houses of Parliament in accordance with either subsection (4) or subsection (5).
(4) A report under this subsection shall be to the effect that the negotiating objective specified in subsection (1) has been achieved.
(5) A report under this subsection shall be to the effect that the negotiating objective specified in subsection (1) has not been achieved.
(6) This Act shall not come into force until a report under either subsection (4) or (5) has been approved via resolution of the House of Commons and considered by the House of Lords.—(Helen Goodman.)
This new clause would require the UK Government to seek continued participation in the Political and Security Committee so as to allow alignment on international sanctions.
Anneliese Dodds
I beg to move, That the clause be read a Second time.
It is a pleasure to serve under your chairmanship, Dame Cheryl, and in rather warmer circumstances than the last time. New clause 9 seeks to create an offence if a relevant body failed to put in place adequate procedures to prevent a person associated with it from carrying out a money laundering facilitation offence. New clause 15 creates a process for disqualification for those at the top level who have failed to prevent money laundering.
I will deal with each new clause in turn and then speak briefly about the overall regulatory context, which creates a necessity for these new approaches. First, on new clause 9 and the failure to prevent the facilitation of money laundering, there are many problems with the existing system. The FCA has found weaknesses in governance and long-standing and significant under-investment in resourcing for control systems, even in the sector that is actually regulated for money laundering. I will talk about some of the problems there later on.
Many of those who investigate in this area find that rules are intermittently enforced, penalties are low and senior executives face few personal, financial or reputational consequences. It is constructive to compare some of the penalties that have been levied in the UK with those levied in the US. As I understand, the largest fine levied in the UK for anti-money laundering or sanctions offences—the Minister may contradict me if I am wrong—was levied against Coutts & Co for £8.75 million. That is six hundred times less than the penalty that was levied by the United States on BNP Paribas for sanctions-related offences.
Anneliese Dodds
It would be helpful to know under which pieces of legislation those fines were levied, because I am uncertain whether they were directly under money laundering legislation. I will come back to that, particularly in relation to some of the outcomes of some parliamentary questions that I have asked to try to dig into this and find out what prosecutions have been enabled by existing legislation.
I am grateful for the information that the Economic Secretary has provided; however, there is still a lot of concern about banks’ and others’ ability to root out money laundering and the facilitating of money laundering. The FCA found—admittedly, in 2014—that there was
“significant and widespread weaknesses in most banks’ anti-money laundering systems and controls”.
That is revealed in the case of HSBC. Many members of the Committee will know that it was involved in a money laundering scandal that led to the US fining it £1.2 billion. There was a large investigation into that matter in the United States Senate, where it was said that our UK-based bank had been a conduit for
“drug kingpins and rogue nations”,
including Mexican drug cartels and North Korea. In fact, that case has been referred to already in this Committee.
Particularly worryingly, a congressional report found that George Osborne and the Financial Services Authority—now the FCA—corresponded on numerous occasions with their US counterparts about the case; in fact, they urged a less aggressive judicial approach on the US side. Apparently, the congressional report said that the UK interventions played a significant role in ultimately persuading the US Department of Justice not to prosecute HSBC. I find it quite concerning that the UK actually argued against measures being taken by other countries to try to deal with this problem.
We were hoping to have some change; the Serious Fraud Office has called for the broadening of existing economic offences to cover a kind of umbrella approach, also to cover failure to prevent. It thinks that that would be helpful to hold large companies to account criminally across the board. At the moment, we have the ability to prosecute the failure to prevent bribery and corruption, but those activities are rarely committed in isolation from instances of money laundering by corporate entities. Therefore, it seems to make sense to try to extend corporate liability to money laundering. That would push in the same direction as existing pieces of legislation. Of course, the Bribery Act 2010 created a new offence of corporate failure to prevent. I believe that Act was put in place because of the same kind of repeated criticism of the UK regime that we have seen in relation to money laundering. We also now have the offence of failure to prevent criminal tax evasion in the Criminal Finances Act 2017. Surely there is now a strong case for an explicit reference to failure to prevent money laundering.
Many of us thought that we were not going to have to push for a separate offence of money laundering because we were to have an umbrella approach. In May 2016, the Government committed to consult on a broad offence of failure to prevent economic crime, which would cover fraud, false accounting and money laundering. In January 2017, the Government downgraded that commitment and instead published a call for evidence on whether there was a case for economic crime corporate liability law reform.
As I understand it, the call for evidence closed in March 2017. I have not yet seen the results of that call for evidence. It would be helpful for the Minister to let us know the outcome of that call for evidence, the main findings and how the Government have decided to act on them. Will they introduce the umbrella offence or create a discrete offence, as we are asking for? Because we think we need action now. That is new clause 19.
Alison Thewliss (Glasgow Central) (SNP)
I do not want to add a huge amount, but I very much welcome the new clause. As the hon. Member for Oxford East said, there is a big issue of incentive and authority for organisations, particularly for those that facilitate the formation and operation of Scottish limited partnerships in the private fund sector.
There has to be an effort to ensure that compliance with the rules is extended as far as possible. For example, a legal firm may be asked to register an SLP to get it up and going, and operating, but if no buck stops with it, there is no punishment for not ensuring that the SLPs are operating as we would want them to. For example, if a firm asks its client to register a person of significant control, and the client does not do so, where is the incentive for that firm to remove that client altogether? The firm has to decide for itself whether the cost of reputational damage from being named in the press is enough. That is the balance that it has at the moment. It is not obliged not to have that SLP within its client base. There is no comeback and no consequence.
There needs to be some means by which the firm is forced to do something to put that right. If the SLPs under its umbrella do not register a person of significant control, and continue not to register them, there is no fine to that legal firm, as I understand it. The SLP may face a fine—I am trying to get to the bottom of how many fines have been issued to those who have not registered a person of significant control—but there is no comeback to the legal firm, other than potential reputational damage.
The Government need to think about where the buck really stops in these arrangements , and this type of new clause would put some emphasis on the firm to do something about failing to prevent money laundering, rather than allowing things to continue as they are. As I understand it, there is no comeback at the moment to the legal firm that is protecting the SLPs underneath its umbrella.
John Glen
I undertake to address the points raised by the hon. Member for Oxford East. I will come to the point about the directors’ responsibility in my scripted remarks and also to the issue of what provision the fines were imposed under.
On the specific question the hon. Lady asked, the Ministry of Justice’s call for evidence considered a wide range of reforms to the law relating to corporate liability for economic crime. That is against a backdrop of already significant reform in this area in recent years, including the Bribery Act 2010, the Criminal Finances Act 2017 and the introduction of deferred prosecution agreements, which the Government would contend have strengthened the UK’s defences against corporate criminality. The Ministry of Justice is carefully considering the responses received to the call for evidence and is analysing the impacts of the Government’s range of recent reforms in this area. It will respond to its call for evidence in due course. I do not have a specific timetable, but that is the best information I can give the hon. Lady.
New clauses 9 and 15 seek to create a corporate criminal offence of failure to prevent money laundering, with an obligation on the Secretary of State to submit a disqualification order to the court against directors of a company found guilty of such an offence without having adequate anti-money laundering procedures in place. New clause 9 provides that a company or partnership is guilty of a criminal offence where the company’s employee, agent or other service provider commits one of the substantive money laundering offences in part 7 of the Proceeds of Crime Act 2002. The relevant company would have a defence if it could prove that it had adequate procedures in place to prevent its employees or agents from committing such an offence.
The offence is not necessary in view of the extensive reforms to the UK’s anti-money laundering regime that the Government have put in place. The proposed offence is substantively applied to firms that are regulated for anti-money laundering purposes by part 2 of the Money Laundering Regulations 2017. Those require that regulated firms have policies, controls and procedures to mitigate and manage risks of money laundering and terrorist financing. The Government have legislated to require that these policies, controls and procedures are proportionate with regard to the size and nature of the firm’s business and proved by the firm’s senior management. Failure to comply with these requirements is a criminal offence in itself.
The Financial Conduct Authority and other supervisors are additionally able to take action against firms if their measures to counter money laundering are deficient. As was touched on in our exchange earlier, recent regulatory penalties related to firms’ anti-money laundering weaknesses include fines of £163 million for Deutsche Bank in January 2017 and £72 million for Barclays Bank in November 2015. They were a consequence of failures in anti-money laundering measures under the Financial Services and Markets Act 2000.
The new clause also seeks to address challenges that have arisen in apportioning responsibility for corporate failings. Within the financial services sector, that has been addressed through the senior managers regime, which was introduced after the financial crisis. Banks are now required to ensure that a named senior manager has unequivocal responsibility for overseeing the firm’s efforts to counter financial crime. That ensures that firms and individuals can be held to account for failing to put proper systems in place to prevent financial crime. If a relevant firm breaches its anti-money laundering obligations, the FCA can take action against a senior manager if it can prove that they did not take such steps as a person in their position can reasonably have been expected to take to avoid the breach occurring. The enforcement action includes fines and disbarment from undertaking regulated activities. The Government have legislated to extend the senior managers regime to apply across all financial services firms. That will be implemented in due course, and will further the Government’s reform programme. All those requirements are additional to the substantive money laundering offences in the Proceeds of Crime Act, such as entering into arrangements that facilitate the use of criminal property, which apply to any individual or company.
As hon. Members know, the Government have previously introduced two similar offences: the failure to prevent bribery, in 2010, and the failure to prevent the facilitation of UK and foreign tax evasion, in 2017. They are structured in a similar way to the proposed new clause, but they were introduced following clear evidence of gaps in the relevant legal frameworks that were limiting the bringing of effective and dissuasive enforcement proceedings. It is right that the offences that we have already established apply to legal entities, regardless of whether they operate in the regulated sector.
The situation in relation to money laundering is very different. The international standard is set by the Financial Action Task Force, which has been referred to numerous times in the Committee’s discussions. The UK’s money laundering regulations apply to banks, financial institutions, certain professional services firms and other types of entity, and act as gatekeepers to the financial system. As I have said, such firms are already required to have policies and procedures in place to prevent their services from being misused for money laundering.
Subsection (6) of new clause 9 would require all companies, regardless of whether they are incorporated, to have procedures in place to prevent persons connected to them from laundering money. The Government do not believe that that would be appropriate. It would risk making non-regulated firms liable for the actions of their regulated professional advisers. Instead, responsibility for anti-money laundering compliance should rest in the regulated sector, as is currently the case. The new clause would not go beyond the existing regulatory framework in that area, and it would blur where responsibility should lie for anti-money laundering compliance. Therefore, I respectfully ask the hon. Member for Oxford East to withdraw the new clause.
Anneliese Dodds
I am grateful to the Economic Secretary for those helpful explanations and clarifications. Despite his useful response, however, there are a number of areas where I am unclear. First, I appreciate that he has probably anticipated this question, but the Committee may ask why it has taken Government a whole year to assess the responses from their consultation on economic crime. Government frequently work at a far faster pace than that. He said that we will have the analysis of those consultation responses in due course. It would be helpful to know more about why it is taking so long for Government to analyse them.
Secondly, the Economic Secretary spoke about the requirement for all regulated firms to ensure that their policies, controls and procedures are appropriate to prevent money laundering, but there is a question about who assesses that and whose responsibility that is. That takes us back to the issue about there being myriad professional bodies, which all operate subtly different approaches towards regulation in this area. As I said, I appreciate that OPBAS has been created to try to draw them together, but I do not think we heard exactly what the status of that office is—I was trying to concentrate on what the Economic Secretary was saying. I have seen different descriptions of it as a team, an office and an organisation. It would be helpful to have a clearer indication, particularly because those professional bodies are, as I understand it, required to contribute financially to OPBAS, so a number of them are keen to understand what is happening with it. Furthermore, HMRC is not a member of it, as I said before, so the concern about a lack of regulatory co-ordination persists.
Finally, the Economic Secretary referred approvingly to the senior managers regime that has been brought in since the financial crisis, which looks like a positive step initially—of course, the HSBC problems occurred following that. In any case, as I understand it, the actual operation of this new regime and its extension are quite different from, for example, what was recommended by the Parliamentary Commission on Banking Standards. Under this approach, the burden to show that senior managers failed to take appropriate steps will be on the regulator, rather than the senior managers themselves.
That is different from the approach taken in many other areas, including road traffic, health and safety at work, the Bribery Act 2010—which the Minister referred to—terrorist legislation, the Misuse of Drugs Act 1971 and so on. It would be helpful to understand why, with the extension of this regime, the burden of proof has essentially now been placed on the shoulders of the regulator, rather than the shoulders of the managers.
Question put, That the clause be read a Second time.
Alison Thewliss
I support the new clauses proposed by the hon. Member for Oxford East. They flag up a huge loophole in the anti-money laundering regime, which is the inability of Companies House to do anything about what comes through its door. By not acting on information, and expecting company formation agents to behave in a different way from the way the Government’s own agency behaves, the Government become complicit in the money laundering that is clearly going on through companies that are registered for only £12.
The situation is curious. Last week I sat on a delegated legislation Committee that discussed passport fees and the need for full cost recovery of those fees by the Government because the Passport Agency wants to ensure that it is not making a loss. There is an argument about whether passports are too expensive, which I think they are, but it costs £12 for the registration of a company. If Companies House is not getting full-cost recovery for that, and that is the reason for not carrying out the due diligence that ought to be done on anti-money laundering, that is an argument to find a reasonable cost of registration that would allow Companies House to operate, make money and have sufficient funds to carry out the due diligence it ought to. If there is an incentive not to play by the rules, and the Government are incentivising that through the operation of its own agency, that is nonsense. That is highlighted in Global Witness’s “The Idiot’s Guide to Money Laundering”:
“Step 4: open your company direct with the corporate registry—they don’t do any checks on you!”
It seems ludicrous that the Government are going to encourage agents who want to set up companies for people to do that and go through the anti-money laundering things that they have to do, but the Government are not enforcing that. That seems absolutely ludicrous. I cannot for the life of me think how the Government will defend that unjustifiable loophole.
Transparency International reported that in the UK last year, 251,628 companies were created with no checks being made on the person setting up the company or their source of wealth. It is a scandal that these companies can be set up, facilitated by the Government, because Companies House has to accept their documents in good faith without doing due diligence checks that we would expect of other agents. If they are not going to support the new clauses, I urge the Government to propose a measure themselves, because this simply cannot continue.
John Glen
The new clauses are broadly similar in purpose and intention. Each would expand the role that Companies House plays in relation to anti-money laundering checks, whether by conducting due diligence directly, confirming that due diligence has been carried out, or confirming that a company seeking to be incorporated has a UK bank account.
I will turn to the practical difficulties of these proposals in a moment, but the first point to make in connection with each is that the UK’s anti-money laundering regime is undergoing an assessment by the Financial Action Task Force. The FATF is the international standard setter in this area and will report publicly later this year on its findings. The report will consider matters, including the effectiveness of how the UK prevents the misuse of legal persons, such as companies, for money laundering purposes. Hon. Members will appreciate that this report will greatly inform the future of the UK’s anti-money laundering regime, including in relation to how we can best prevent the misuse of legal entities, some of which have been described in the course of this debate.
Once the FATF has reported, the Government will actively consider its conclusions, including those in relation to any areas in which the UK’s anti-money laundering framework can be improved. These new clauses pre-empt the review process already under way. It would be more sensible to allow the review to identify specific areas where action is necessary before making further changes to our AML regime.
New clause 10 would require anti-money laundering checks to be undertaken before any UK company can be incorporated by preventing the registrar of companies from registering a company unless she is satisfied that such checks have been carried out. It then says that the registrar is entitled to accept the anti-money laundering registration number of the UK body that has submitted the application as evidence that such checks have taken place. The effect would be to require all incorporations to be made through a UK body regulated for anti-money laundering purposes. This would prevent people from applying directly to Companies House to register and set up their own business; any person seeking to set up a business would be required to use the services of a professional agent that is also regulated for anti-money laundering purposes, and pay for those services, which will in turn increase the cost of setting up businesses.
The proposed new clause assumes that all bad companies are set up directly with Companies House, and that only companies set up through the agency of a regulated professional can be trusted. That is simply not true. Only the simplest companies—those using standard-form constitutions—can be set up directly with Companies House online in the way described by the hon. Member for Glasgow Central. Typically they are self-standing, family-run and family-operated businesses. More complex corporate structures will, in contrast, frequently be established through trust or company service providers. The UK’s national risk assessment of money laundering and terrorist financing noted last year that
“While companies can be registered directly with Companies House, criminals continue to make use of third party TCSPs, to establish the structures within which illegitimate activity subsequently takes place.”
The fact that TCSPs are legally required to conduct customer due diligence does not in and of itself solve the problem. The new clause would therefore impose an across-the-board administrative burden on individuals seeking to establish companies, without adding any significant new obstacles to money laundering. Companies incorporated directly through Companies House are overwhelmingly likely to interact with the UK regulated sector, and so face anti-money laundering checks either by having a UK bank account or through having a UK accountant.
We discussed in the previous debate the 22 different regimes, and this speaks to the necessity for some degree of complexity to minimise the risks as far as possible. New clauses 11 and 12 are similar in outcome to new clause 10: they would require company formation agents—defined for these purposes as including the UK registrar of companies at Companies House—to conduct customer due diligence to establish the identity and risk profile of all beneficial owners of such companies registered at Companies House. The key difference is the reclassification of Companies House, which would now be required to deliver its statutory duties as if it were a private sector business. The accompanying explanatory statement suggests that these clauses will identify the beneficial owners of a company and make information held at Companies House more accurate. Although similar to the proposed new clause 10, these new clauses would go further in imposing expansive new obligations upon Companies House, requiring significant changes to the UK company law system.
Given the overlap with the lead new clause group, I will focus on the most novel element: the proposal that Companies House be treated as a company formation agent. Since the registrar of companies was first created, it has been required to accept any application that is validly and correctly submitted, and to duly incorporate the company as requested. Companies House does not help customers through this process, and is responsible solely for conducting the process of company incorporation. Company formation agents, known as TCSPs, are entirely distinct from Companies House. They are already subject to due diligence obligations through the Money Laundering Regulations 2017, and these extend to being required to terminate any existing business relationship when they are unable to meet their due diligence obligations. In contrast, Companies House has no legal right to refuse or decline a request to incorporate a company if the application is valid, and therefore it does not have the ability to decline a business relationship in the way that TCSPs must when they cannot discharge their due diligence obligations. If accepted, these amendments would essentially require fundamental reform of the Companies Act 2006.
To emphasise the scale of that proposed reform, 3.9 million companies are currently registered at Companies House and approximately 600,000 new companies register each year. The impact on resource to carry out due diligence on that number of companies would be considerable. The burdens and cost would fall on those 3.9 million companies, and specifically on the vast majority of legitimate companies, many of which are very small businesses. They would be forced to pay to duplicate the cost of due diligence checks that are already conducted by banks and other regulated professionals. The overall cost to the UK economy could run into hundreds of millions of pounds each year.
New clause 13 would amend part 24 of the Companies Act so as to require UK companies to establish a UK bank account and evidence that to Companies House on an annual basis or pay a fee or financial penalty. As with other new clauses in this group, new clause 13 will not achieve its stated intention. The wider purpose behind that part of the Act is to provide a simple mechanism for companies to confirm that corporate information registered with Companies House, as required under other obligations, is accurate and up to date in relation to company share capital, business activities and the address of a company’s registered office.
That is not to say that the new clause’s underlying principle does not merit further consideration. Evidence of a UK bank account is intended to demonstrate that a company has been through proper money laundering checks by a UK supervising body related to the financial activities of that company. However, the practical implications need careful consideration. To make the proposal operational, Companies House would require new systems with access to UK and international banking information. The costs associated with the development and operation of such systems would inevitably be large and would need to be recovered from UK businesses. Once again, that would necessarily establish a new reporting burden that would essentially target the overwhelming majority of law-abiding UK businesses.
The new clause suggests that companies that cannot provide evidence that they have a UK bank account would be liable to a fee, although that could better be characterised as a penalty—its purpose is not specified. If it is intended to incentivise companies that are established to launder money to open a UK bank account, it would need to be set sufficiently high to achieve that objective, which would be disproportionate to the notional offence of not providing evidence of a UK bank account.
The Government are already active in that sphere. Under the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017, regulated bodies such as banks are obliged to carry out CDD checks on their customers on an ongoing basis. That is a rich field of data, and the regulated sector is already closely engaged with UK law enforcement to identify and report suspicious behaviour. In parallel, Companies House has an extensive outreach programme to the regulated sector to promote use of its data and encourage bodies to report possible errors back to it.
To sum up, a simple demonstration of a bank account is a blunt instrument. As drafted, the new clause simply adds a burden to UK companies to report more information. We should not proceed down that path without being much clearer that the information we require them to disclose is valuable, that it is necessary and that it cannot be achieved by other less burdensome means. On that basis, I ask the hon. Member for Oxford East to withdraw the amendment.
Anneliese Dodds
We tabled the new clause because ineffective anti-money laundering supervision has a clear and obvious link with inadequate compliance and with low and poor-quality reporting of suspicious activity to the National Crime Agency. Research by a number of non-governmental organisations, particularly Transparency International, has indicated serious failings in the current framework for supervising money laundering compliance in the UK, especially with respect to trust and company service providers.
Under the Money Laundering Regulations 2017, only TCSPs carrying on business in the UK—that is their formulation in the legislation—have to register with an anti-money laundering supervisor and comply with MLR 2017. That means of course that TCSPs with no UK presence can incorporate UK companies without any oversight from an AML supervisor. They do not have to comply with UK standards for money laundering checks. We have seen a number of clear examples—I will talk about some in a moment—where that has allowed non-UK TCSPs to incorporate UK companies that have subsequently been used in large-scale money laundering schemes. I think many of the concerns raised a moment ago around undercutting existing legislation and the lack of a fair playing field for UK TCSPs come up again in this regard.
In 2012 the International Consortium of Investigative Journalists showed how a number of UK individuals offering company services had moved their base of operations outside our country but continued to form, and act as nominee directors for, UK companies. There are two examples that are particularly important. The first was Jesse Grant Hester, who was originally from the UK and who moved to Cyprus to form Atlas Corporate Services Ltd before moving to Dubai and, finally, Mauritius—he is somebody who has been lucky enough to travel much in life. Those jurisdictions have all been identified as presenting high money laundering risks. Mauritius in particular is very concerning: it scored 5.92 out of 10 on the Basel Institute on Governance money laundering risk index. Ten is the highest level of money laundering risk and zero is the least, so it is well up there. Jesse Grant Hester appeared on numerous occasions as a nominee director for companies embroiled in corruption scandals. In the Moldovan bank theft that we talked about earlier, he signed fake promissory notes using an alias on behalf of a UK firm, Goldbridge Trading Ltd, allowing £444 million to be stolen. Atlas Corporate Services is associated with eight people who, between them, have held directorships of 3,613 UK companies. Again, that is a staggering number of companies to be held by just eight people. As we discussed, that scandal caused enormous problems for the country of Moldova.
Another UK resident who became internationally renowned, although not in a positive way, for his company formation activities, is Ian Taylor. That is not the famous social policy academic, who I had the pleasure of working with, but another Ian Taylor. He also moved around a lot: he moved to Vanuatu.
Anneliese Dodds
Oh, there was a Tory MP as well. Goodness—the name is frequently used. He moved to Vanuatu after he was banned from being a corporate director, first in New Zealand in 2011 and then in the UK in 2015, as a result of his companies’ involvement in numerous scandals, including a land banking scam in Somerset. Vanuatu’s self-assessment on money laundering risk found that its TCSP sector was among the most vulnerable to such activity. In 2015 the Asia/Pacific Group on Money Laundering found serious deficiencies in Vanuatu’s AML system. Despite being banned in the UK, Taylor seems to have retained a UK presence. Various investigations have identified the circle of nominee directors that he works with. One of them is a Vanuatu resident who is a director of more than 61 companies. He took over from Taylor as a director of 20 of them on the same date.
Those examples show that physically moving out of the UK does not result in a lack of activity in the UK. Networks of associates make it difficult to stop the formation of UK companies by individuals who have already been disqualified here. Such individuals, who have been shown to have engaged in money laundering activities or have otherwise been disqualified or viewed as not competent in this arena, can function in other countries and create companies. The checking that should go on does not happen, and there is inadequate anti-money laundering supervision. We do not have a means of dealing with that, because we do not have a regulatory system for TCSPs that are not based in countries with appropriate anti-money laundering provisions. That is not currently illegal, which is why we want to change the legal situation.
John Glen
I am grateful to the hon. Lady for setting out her new clause, which would prohibit TCSPs that do not conduct business in the UK from incorporating UK companies, unless they are overseen by a UK anti-money laundering supervisor. As hon. Members will know, the Money Laundering Regulations 2017 specifically provide for TCSPs conducting business in the UK to be subject to a fitness and propriety test and to register with either Her Majesty’s Revenue and Customs or the Financial Conduct Authority. In borderline cases where it is unclear whether a TCSP is conducting business in the UK—in which case it would be supervised by a UK anti-money laundering supervisor—HMRC would consider on a case-by-case basis whether registration for supervision is necessary. This acts as an anti-evasion mechanism preventing TCSPs from artificially claiming that they are outside the scope of the UK’s anti-money laundering regime.
The hon. Member for Oxford East asked earlier where this was based. The Government recently established the Office for Professional Body Anti-Money Laundering Supervision, known as OPBAS, within the Financial Conduct Authority. It works to secure consistently high standards of AML supervision of professional bodies, including TCSPs. These reforms follow the identification of risks associated with TCSPs in the Government’s 2016 action plan for anti-money laundering and counter-terrorist financing. This found that service sectors such as TCSPs were a significant money-laundering threat.
Although it is for anti-money laundering supervisors to determine their areas of focus, they are required to have regard for the UK’s national risk assessment of money laundering and terrorist financing when assessing risks in their own sector. The risk assessment that the Government published in October last year concludes:
“The highest risk TCSPs are assessed to be UK TCSPs which offer a wide range of services (including nominee directors, registered office services, and banking facilities)”.
Additionally, individual anti-money laundering supervisors are under a duty to identify and assess the international and domestic risks of money laundering and terrorist financing to which their sectors are subject.
Helen Goodman
I am surprised by what the Minister is saying. He obviously did not listen to the BBC “Analysis” programme that was broadcast about three weeks ago on the role of overseas TCSPs. We think it is great when people build real-life factories as a jumping-off point into the single market, but it is evident that TCSPs and banks located in the Baltic states, which do not have such good anti-money laundering regulatory regimes, attract money and are used as a jumping-off point to move that money into the European system. Does the Minister really think that the anti-money laundering regimes throughout the European Union are as effective the one in the UK?
John Glen
I cannot comment on the specific cases that the hon. Lady mentions, because I have not seen or studied them. I imagine that there is a degree of variability in the effectiveness of regimes, but I am trying to set out the Government’s rationale for what we have in place. I do not suggest that it is perfect, but some of the developments have occurred in response to shortcomings that have been identified.
The individual anti-money laundering supervisors are under a duty to identify and assess international and domestic risks, including the money laundering and terrorism risk, which ensures that the most intensive supervision is applied where the highest risks of money laundering exist. The establishment of OPBAS will assist with the consistent identification of such risks across the TCSP sector. Our national risk assessment makes it clear that the Government are aware of the money laundering risks connected with TCSPs, and further reform in the area should take account of the conclusions of the ongoing FATF review. I assure Opposition Members that the regime is a searching and exacting one. I know from ministerial meetings concerning preparations for it that the evaluation will be exacting. We expect the observations to be meaningful, and we will need to respond carefully to them. However, until we receive the outcome of that review of the UK’s anti-money laundering regime and of the experience of OPBAS as its role develops, it would not be appropriate to adopt the amendment.
Hon. Members should be mindful of the fact that anti-money laundering supervision around the world follows a territorial model. Simply requiring non-UK TCSPs to have a UK supervisor when they set up UK companies will not address the challenges of extra-territorial supervision. Effective anti-money laundering supervision depends on measures that include supervisory on-site visits and close engagement with higher-risk firms. Requiring a UK supervisor to do that in relation to a non-UK firm will not, in and of itself, address the issue that hon. Members have identified.
As was noted in the other place, the most effective means of combating international money laundering is cross-border co-operation to drive up the standards of overseas supervision and enforcement. For those reasons, we have imposed a duty on each UK anti-money laundering supervisor to take such steps as they consider appropriate to co-operate with overseas authorities. That is the agenda we pursue through the global FATF process. I therefore respectfully ask the hon. Lady to withdraw the new clause.
Anneliese Dodds
I am grateful to the Minister for those remarks and clarifications. They have been genuinely helpful, but I regret that some areas are still rather unclear to me; perhaps they are not to other Committee members. He stated that the highest-risk TCSPs are assessed to be UK ones, but it has not been spelled out why. Perhaps he could write to me about that.
Anneliese Dodds
I am grateful to the Minister for offering to look into that. We must always be wary of talking about a general pattern of activity as necessarily reflecting the risk profile of that overall activity. Among those TCPS, there could be overseas ones that are not appropriately regulated and that also offer a wide range of services, in the same way as some UK TCSPs do.
I am also a bit confused about the professional regulators. As the Minister said, there are about 22 of them, and then on top of that we stick Her Majesty’s Revenue and Customs, the Financial Conduct Authority and so on. As I understand it, the professional regulators do not have members based in other countries; they cover only UK residents. We are talking about, for example, the Law Society of Scotland and the Law Society of England and Wales—professional bodies dealing with UK individuals. We are not talking about professional associations covering professionals in other countries.
The Minister seemed to talk about a process of liaison between these organisations and their counterparts in other countries. I am sure we all want to encourage that, because it sounds like a very good idea. Information sharing is wonderful, but information sharing is not the same as having an appropriate process of regulation to ensure that there is compliance with anti-money laundering requirements.
The Minister said that the approach was an extraterritorial one, because it affects bodies in other countries. That is absolutely right, but those bodies then interact with our company formation procedure. That is the reason why we, as a country, have a stake in this process—a rather large one, given the reputational damage that seems to be being caused by the activities of some unregulated or inappropriately regulated TCSPs. I will be pressing the new clause to a vote.
Question put, That the clause be read a Second time.
John Glen
I just want to clarify that, while I would not profess to be an expert on Pakistan’s compliance with the FATF, the concerns raised about its recent greylisting were around the specific handling of various banned terrorist organisations. I would not wish to cast any wider doubt over its intentions to improve the provision of services.
Anneliese Dodds
I thank the Minister for that helpful clarification. It is helpful to know the exact locus of FATF activity or the concerns about Pakistan that were focused on terrorist financing. That is not the area we are focused on now, but such financing and money laundering often go hand in hand.
Given the potential effects of such a ruling—we have talked about that in relation to Pakistan—we think it necessary that Ministers should have the flexibility to ensure that FATF standards can be implemented as soon as possible in our country in order to be on top of new international standards. That is particularly important because the UK was a founding member of the FATF, so we need to show that we are at the cutting edge of implementing its requirements.
As I mentioned, we also need to be able to identify or revoke high-risk countries quickly, taking account of the FATF’s standards and given the effect that it can have on the countries themselves and also on our reputation. If we are viewed as not following FATF recommendations, that prevents the co-ordinated approach that the FATF was set up to promote in the first place.
Finally on this amendment, we hope that Ministers will take account of aligning the designations with our EU partners. We have talked consistently in our deliberations about the need for co-ordination, which of course makes all the mechanisms much more effective. When they are not co-ordinated, there can be loopholes. In that regard, it is important to mention the case of Russia. In 2014, the Arms Export Controls Committees—we talked about their composition when we talked about scrutiny arrangements—reported that more than 200 licences to sell British weapons to Russia, including missile-launching equipment, were still in place, despite David Cameron’s claim that the Government had imposed an absolute arms embargo against Russia in alignment with the rest of the EU. We really need to make sure that that alignment is genuine in practice, not just on the surface and rhetorical.
John Glen
New clause 16 would limit amendments to the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 to those that would implement standards published by the Financial Action Task Force, or those whose purpose was identifying or revoking a designation of a high-risk third country. The 2017 regulations transpose the fourth EU anti-money laundering directive, which was in turn derived from the most recent major updates to the FATF standards, which were made in 2012. As the hon. Lady acknowledged, the UK is a founder member of the FATF and is committed to playing a leading role in its continuing work. It is right for the Government to have the power to update the UK regime when such standards change.
There are, however, several areas where the UK’s anti-money laundering regime already goes beyond those standards. Our recently established register of trusts generating tax consequences, for example, goes beyond the standards set by the FATF. Similarly, the UK announced at the time of the 2015 Budget that we intended to regulate virtual currency exchanges for AML purposes—an objective that was accomplished through negotiation of the fifth EU anti-money laundering directive—but that was not required by the FATF. So although we will remain aligned with the FATF standards after the UK ceases to be a member of the EU, our anti-money laundering regime exceeds those standards in certain areas.
The Government are determined to ensure that our defences against misuse of a financial system remain ahead of global standards rather than solely reflecting them. That is reflected in our commitment to the establishment of a public register of the beneficial ownership of non-UK companies that own UK property, which the Committee debated earlier, even if we did not agree on the timeline for it. The new clause would reduce our ability to do so. Under the power in question, the UK’s anti-money laundering regime could not go further in areas where we would otherwise want to.
As I said previously, in debating amendment 7, and as my right hon. Friend the Minister said about new clause 3, we do not believe that a bar on new offences is the right way to address the concerns raised by Lord Judge and others. We have instead tabled amendments to ensure that the power is used only where it is needed, and that Ministers are properly accountable to Parliament for it.
Ensuring that we can make regulations to prevent, or to enable or facilitate the detection or investigation of, money laundering or terrorist financing, as well as to implement the standards of the FATF, is the most certain method of placing future changes to our anti-money laundering system on a sound legal basis. The new clause would limit our ability to do so in the future, and I am sure that is not the intention behind it. I respectfully suggest that the hon. Lady might withdraw it.
Anneliese Dodds
I am grateful to the Minister for his explanation. It may be the fact that we have been in this room for a few hours, but I am struggling a little with, in particular, the suggestion that new clause 16 would somehow tie the UK’s hands in implementing additional requirements beyond the FATF standards.
The Minister referred to the public register of property owned by non-UK entities. We had a discussion about that, but he is right: it would arguably be an innovation in the UK. Of course it is one that we need more than other countries, because of the use of our property market in many such cases, and the exponential rise in house prices. He could have talked—although he did not—about the register of beneficial ownership of companies being an innovation as well, but countries such as the Netherlands and Norway are putting those into practice anyway, so perhaps we are not quite as far-reaching in what we are doing as we might suggest. Particularly in relation to the charges and fines levied against those found guilty of money laundering offences, we seem to be in a different position from that of our North American counterparts, for example, as we have discussed. None the less, it is not clear how the new clause would stop us going further than those other jurisdictions where we wished to do so. It says that we would take account of the
“best international practice including EU sanctions regimes”,
not that we would be led by it.
Sanctions and Anti-Money Laundering Bill [ Lords ] (Sixth sitting)
John Glen Excerpts(8 years ago)
Public Bill CommitteesRead Full debate Read Hansard Text Read Debate Ministerial Extracts
The Economic Secretary to the Treasury (John Glen)
May I say what a pleasure it is to serve under your chairmanship once again, Dame Cheryl? I acknowledge that the amendment seeks to set in legislation an obligation on the Government to implement, within 12 months of Royal Assent, our commitment to establish a public register of company beneficial ownership information for foreign companies that already own or buy property in the UK or who bid on UK central Government contracts. It puts an accelerated timetable on something that the Government are doing anyway. In the next few minutes, I will remind the Committee of the timetable to which the Government are committed for delivery of this policy. I will set out the challenges and complexities of the policy and demonstrate why setting an early and artificial deadline for implementation would inadvertently undermine its aims. I know that these are supported across the House, so it is important to ensure that we get the detail of the policy right.
In listening to the remarks made by the hon. Member for Bishop Auckland, I acknowledge the frustration around this; but this Government are committed to continue to lead by example and improve corporate transparency. Over the past five years, the reforms delivered by the Department for Business, Energy and Industrial Strategy have made the UK a global leader on corporate transparency issues. We were the first country in the G20 to establish a fully and publicly accessible company beneficial ownership register and, across the world, non-governmental organisations lobby their Governments to follow the UK example. There is a reason we have that world-leading reputation: it is because of the quality of the measures we have passed and it is a reputation we would lose if this measure were accepted. A 12-month timetable to draft and pass primary and secondary legislation, empower the responsible agencies and commence the obligations is not realistic. The rush to meet such an unrealistic deadline would inevitably lead to loopholes that would be readily exploited by those seeking to evade the new requirements.
Alex Norris
We are not just talking about a 12-month timetable; this was first announced by a Conservative Prime Minister in 2015. What have Ministers been doing since then?
John Glen
I will come on to explain the history of this and why we are where we are. I am happy for the hon. Gentleman to intervene if he does not feel satisfied at the end of that.
Mindful that the eyes of the world are on us, hon. Members should recognise that this legislation would be a world first. Successful delivery raises significant challenges and it is right that the Government achieve the right balance in an effective regime with robust enforcement that does not have a negative impact on land registration processes across the UK. I acknowledge that some have accused the Government—and we have also been accused this afternoon—of not acting swiftly enough to implement this policy. Let me address those concerns.
We have committed to publishing a draft Bill before the summer to introduce the Bill early in the second Session and for the register to be operational in 2021. Publishing a Bill in draft is the right approach. As I said before, this register will be the first of its kind in the world, and it will affect people’s property rights, including not just new purchasers but existing owners. This is a sensitive and delicate area. Getting it wrong would have significant adverse consequences.
Anneliese Dodds
The Minister is being generous. He has kindly set out for us a three-year timetable, adding on a couple of years before that when Government committed to this. Is he aware of the Private Eye map, which has been in existence for some time? Through civil society and journalistic activity, Land Registry and Companies House data were put together and a map produced. That appears to have been done quite quickly.
John Glen
I am not familiar with that particular map but I would be very happy to examine it. For clarity, and addressing the hon. Lady’s previous point, the register will capture the details of beneficial owners of all non-UK companies—including those in the overseas territories—that own UK property. This will be a world first, so we are moving as fast as possible, while ensuring that the register is as comprehensive as possible.
As the Government set out in last year’s call for evidence, for the register to be effective the sanctions to be applied for non-compliance must be a meaningful deterrent. Enforcement must be energetic. Simple criminal sanctions may not be sufficient in isolation. The draft Bill will include enforcement through land registration law. Where an overseas entity buys property, it will never be able to obtain legal title to that property without having complied with the register’s requirements. Similarly, a restriction on the title register for property owned by an overseas entity will signal to third parties that the overseas entity must comply with the regime before selling the property, creating a long lease or legal charge. Those are significant steps on which it is right to consult.
Hon. Members will recognise that there are separate Land Registries in Scotland and Northern Ireland, as well as the Land Registry for England and Wales. The approaches taken to land registration and overseas entities by each of those Land Registries have been different until now. That too will need be streamlined. Delivery of an holistic outcome that complements all three land registration regimes is an exercise touching multiple teams across Government and the Land Registries. Put simply, it is an exercise that will take time to get right and a further demonstration of why publishing the legislation in draft is the appropriate next step if we are to get it right. Although I appreciate that the motive underlying the new clause supports the policy as a whole and demonstrates a desire for early delivery and implementation, it does not take account of the complexities that I have set out or the challenges of delivery and implementation.
The register will further demonstrate the Government’s commitment to combating money laundering through the property market. Hon. Members will have seen recent press reports—the hon. Member for Bishop Auckland drew our attention to the splash on 3 February—that two unexplained wealth orders have been obtained by the National Crime Agency in connection with two properties worth £22 million.
Those are the first orders obtained under the relevant powers conferred by the Criminal Finances Act 2017, which commenced at the end of January. They were obtained only a few days after it came into effect. As the Minister for Security and Economic Crime has said, the orders are an important addition to the UK’s ability to tackle illicit finance, and it is great to see them already in use.
The Government will continue to take action. BEIS’s response to last year’s call for evidence will be published shortly, and it will set out the Government’s approach to areas of particular complexity. BEIS has already made significant progress in preparing draft legislation; the work with the office of the parliamentary counsel to draft the Bill is under way.
Separately, BEIS is working to quantify the impact of the legislation on the UK. The impact assessment will quantify the register’s potential impact on the property market and investment flows, around which foreign direct investment is very specific, to pick up on the point made by the hon. Member for Bishop Auckland. The register will rightly make the UK more hostile to illicit flows of money, but we must understand the potential impact on legitimate inward investment.
All those issues were considered in last year’s call for evidence. Scrutiny of the draft Bill will further stress-test whether it will be effective. I hope that that process demonstrates the Government’s continued commitment to enact the policy, and our commitment to get it right. For those reasons, I hope that the hon. Lady will withdraw the new clause.
Richard Benyon (Newbury) (Con)
I think it is worth saying for the record that there is a chill wind blowing through the financial lives of some of the people who have used our economy, particularly our property sector, for nefarious purposes and money laundering. From my conversations with a current Security Minister, and from what I know the Government are doing to implement the asset freeze legislation, I have no doubt that that is being taken forward aggressively and in a determined way. That is being recognised abroad; it is certainly being recognised by some of those people who have used the ability of our economy, through good title deeds, to make property a means by which to bury nefarious funds.
We are talking about legislation to hold future Governments to account. I entirely accept my hon. Friend the Economic Secretary’s assertion that this a complex situation to get right. I would like a little more clarification, and I am prepared to cut him some slack on this because if this is not done properly, it will be exploited and people will be able to move wealth in a globalised economy in a much freer way. It should be tied down in a way that encourages people still to invest in this country. I welcome the fact that people want to invest in our property, whether commercial or residential, but not, as the hon. Member Bishop Auckland says, just to leave homes empty. I recognise that that is a real issue, but there is the sheer importance of making sure that all of the provisions are correct. I know it has been complicated: in the asset freeze legislation, there was institutional resistance to what are called Magnitsky-lite measures that were introduced. In a classic piece of good ministerial play, the Government faced down those institutional problems that existed in parts of the civil service and elsewhere and took that forward. To their credit, they are now implementing the measures. I would just like some more assurance from my hon. Friend that this complexity will be tackled with urgency.
John Glen
I am grateful to my right hon. Friend the Member for Newbury and to the Member for Nottingham North for their further observations. I understand the sentiments of frustration and impatience with the Government on this matter. I hope I have spelled out in some detail—in the areas of land registration; alignment around the different parts of the United Kingdom; and making sure that the penalties are appropriate and that the enforcement measures are set to meet the challenge—that the Government have bold ambitions to get this right and to be a world leader in this area. I acknowledge that this has taken rather longer than it would have done in ideal circumstances, but I can confirm and reiterate to my right hon. Friend that the Government are fully committed to delivering this as soon as possible, and that there is a commitment across multiple Departments and the ministerial team to ensure that this reflects the bold aspirations that we have as a nation. I hope that that would be sufficient for us to move on.
Helen Goodman
Ministers have heard that this is an issue of significant concern, and interest in making speedy progress has been expressed on both sides. We will return to this on Report and, that being the case, I do not intend to press it to a vote. I beg to move that the clause be withdrawn.
Clause, by leave, withdrawn.
New Clause 6
Alignment of sanctions
(1) It shall be a negotiating objective of Her Majesty’s Government in negotiations on the matters specified in subsection (2) to continue the United Kingdom’s participation in the Political and Security Committee of the European Union in order to align sanctions policy with the European Union.
(2) Those matters are—
(a) the United Kingdom’s withdrawal from the European Union, and
(b) a permanent agreement with the European Union for a period subsequent to the transitional period after the United Kingdom’s withdrawal from the European Union.
(3) It shall be the duty of the Secretary of State to lay a report before both Houses of Parliament in accordance with either subsection (4) or subsection (5).
(4) A report under this subsection shall be to the effect that the negotiating objective specified in subsection (1) has been achieved.
(5) A report under this subsection shall be to the effect that the negotiating objective specified in subsection (1) has not been achieved.
(6) This Act shall not come into force until a report under either subsection (4) or (5) has been approved via resolution of the House of Commons and considered by the House of Lords.—(Helen Goodman.)
This new clause would require the UK Government to seek continued participation in the Political and Security Committee so as to allow alignment on international sanctions.
Anneliese Dodds
I beg to move, That the clause be read a Second time.
It is a pleasure to serve under your chairmanship, Dame Cheryl, and in rather warmer circumstances than the last time. New clause 9 seeks to create an offence if a relevant body failed to put in place adequate procedures to prevent a person associated with it from carrying out a money laundering facilitation offence. New clause 15 creates a process for disqualification for those at the top level who have failed to prevent money laundering.
I will deal with each new clause in turn and then speak briefly about the overall regulatory context, which creates a necessity for these new approaches. First, on new clause 9 and the failure to prevent the facilitation of money laundering, there are many problems with the existing system. The FCA has found weaknesses in governance and long-standing and significant under-investment in resourcing for control systems, even in the sector that is actually regulated for money laundering. I will talk about some of the problems there later on.
Many of those who investigate in this area find that rules are intermittently enforced, penalties are low and senior executives face few personal, financial or reputational consequences. It is constructive to compare some of the penalties that have been levied in the UK with those levied in the US. As I understand, the largest fine levied in the UK for anti-money laundering or sanctions offences—the Minister may contradict me if I am wrong—was levied against Coutts & Co for £8.75 million. That is six hundred times less than the penalty that was levied by the United States on BNP Paribas for sanctions-related offences.
Anneliese Dodds
It would be helpful to know under which pieces of legislation those fines were levied, because I am uncertain whether they were directly under money laundering legislation. I will come back to that, particularly in relation to some of the outcomes of some parliamentary questions that I have asked to try to dig into this and find out what prosecutions have been enabled by existing legislation.
I am grateful for the information that the Economic Secretary has provided; however, there is still a lot of concern about banks’ and others’ ability to root out money laundering and the facilitating of money laundering. The FCA found—admittedly, in 2014—that there was
“significant and widespread weaknesses in most banks’ anti-money laundering systems and controls”.
That is revealed in the case of HSBC. Many members of the Committee will know that it was involved in a money laundering scandal that led to the US fining it £1.2 billion. There was a large investigation into that matter in the United States Senate, where it was said that our UK-based bank had been a conduit for
“drug kingpins and rogue nations”,
including Mexican drug cartels and North Korea. In fact, that case has been referred to already in this Committee.
Particularly worryingly, a congressional report found that George Osborne and the Financial Services Authority—now the FCA—corresponded on numerous occasions with their US counterparts about the case; in fact, they urged a less aggressive judicial approach on the US side. Apparently, the congressional report said that the UK interventions played a significant role in ultimately persuading the US Department of Justice not to prosecute HSBC. I find it quite concerning that the UK actually argued against measures being taken by other countries to try to deal with this problem.
We were hoping to have some change; the Serious Fraud Office has called for the broadening of existing economic offences to cover a kind of umbrella approach, also to cover failure to prevent. It thinks that that would be helpful to hold large companies to account criminally across the board. At the moment, we have the ability to prosecute the failure to prevent bribery and corruption, but those activities are rarely committed in isolation from instances of money laundering by corporate entities. Therefore, it seems to make sense to try to extend corporate liability to money laundering. That would push in the same direction as existing pieces of legislation. Of course, the Bribery Act 2010 created a new offence of corporate failure to prevent. I believe that Act was put in place because of the same kind of repeated criticism of the UK regime that we have seen in relation to money laundering. We also now have the offence of failure to prevent criminal tax evasion in the Criminal Finances Act 2017. Surely there is now a strong case for an explicit reference to failure to prevent money laundering.
Many of us thought that we were not going to have to push for a separate offence of money laundering because we were to have an umbrella approach. In May 2016, the Government committed to consult on a broad offence of failure to prevent economic crime, which would cover fraud, false accounting and money laundering. In January 2017, the Government downgraded that commitment and instead published a call for evidence on whether there was a case for economic crime corporate liability law reform.
As I understand it, the call for evidence closed in March 2017. I have not yet seen the results of that call for evidence. It would be helpful for the Minister to let us know the outcome of that call for evidence, the main findings and how the Government have decided to act on them. Will they introduce the umbrella offence or create a discrete offence, as we are asking for? Because we think we need action now. That is new clause 19.
Alison Thewliss (Glasgow Central) (SNP)
I do not want to add a huge amount, but I very much welcome the new clause. As the hon. Member for Oxford East said, there is a big issue of incentive and authority for organisations, particularly for those that facilitate the formation and operation of Scottish limited partnerships in the private fund sector.
There has to be an effort to ensure that compliance with the rules is extended as far as possible. For example, a legal firm may be asked to register an SLP to get it up and going, and operating, but if no buck stops with it, there is no punishment for not ensuring that the SLPs are operating as we would want them to. For example, if a firm asks its client to register a person of significant control, and the client does not do so, where is the incentive for that firm to remove that client altogether? The firm has to decide for itself whether the cost of reputational damage from being named in the press is enough. That is the balance that it has at the moment. It is not obliged not to have that SLP within its client base. There is no comeback and no consequence.
There needs to be some means by which the firm is forced to do something to put that right. If the SLPs under its umbrella do not register a person of significant control, and continue not to register them, there is no fine to that legal firm, as I understand it. The SLP may face a fine—I am trying to get to the bottom of how many fines have been issued to those who have not registered a person of significant control—but there is no comeback to the legal firm, other than potential reputational damage.
The Government need to think about where the buck really stops in these arrangements , and this type of new clause would put some emphasis on the firm to do something about failing to prevent money laundering, rather than allowing things to continue as they are. As I understand it, there is no comeback at the moment to the legal firm that is protecting the SLPs underneath its umbrella.
John Glen
I undertake to address the points raised by the hon. Member for Oxford East. I will come to the point about the directors’ responsibility in my scripted remarks and also to the issue of what provision the fines were imposed under.
On the specific question the hon. Lady asked, the Ministry of Justice’s call for evidence considered a wide range of reforms to the law relating to corporate liability for economic crime. That is against a backdrop of already significant reform in this area in recent years, including the Bribery Act 2010, the Criminal Finances Act 2017 and the introduction of deferred prosecution agreements, which the Government would contend have strengthened the UK’s defences against corporate criminality. The Ministry of Justice is carefully considering the responses received to the call for evidence and is analysing the impacts of the Government’s range of recent reforms in this area. It will respond to its call for evidence in due course. I do not have a specific timetable, but that is the best information I can give the hon. Lady.
New clauses 9 and 15 seek to create a corporate criminal offence of failure to prevent money laundering, with an obligation on the Secretary of State to submit a disqualification order to the court against directors of a company found guilty of such an offence without having adequate anti-money laundering procedures in place. New clause 9 provides that a company or partnership is guilty of a criminal offence where the company’s employee, agent or other service provider commits one of the substantive money laundering offences in part 7 of the Proceeds of Crime Act 2002. The relevant company would have a defence if it could prove that it had adequate procedures in place to prevent its employees or agents from committing such an offence.
The offence is not necessary in view of the extensive reforms to the UK’s anti-money laundering regime that the Government have put in place. The proposed offence is substantively applied to firms that are regulated for anti-money laundering purposes by part 2 of the Money Laundering Regulations 2017. Those require that regulated firms have policies, controls and procedures to mitigate and manage risks of money laundering and terrorist financing. The Government have legislated to require that these policies, controls and procedures are proportionate with regard to the size and nature of the firm’s business and proved by the firm’s senior management. Failure to comply with these requirements is a criminal offence in itself.
The Financial Conduct Authority and other supervisors are additionally able to take action against firms if their measures to counter money laundering are deficient. As was touched on in our exchange earlier, recent regulatory penalties related to firms’ anti-money laundering weaknesses include fines of £163 million for Deutsche Bank in January 2017 and £72 million for Barclays Bank in November 2015. They were a consequence of failures in anti-money laundering measures under the Financial Services and Markets Act 2000.
The new clause also seeks to address challenges that have arisen in apportioning responsibility for corporate failings. Within the financial services sector, that has been addressed through the senior managers regime, which was introduced after the financial crisis. Banks are now required to ensure that a named senior manager has unequivocal responsibility for overseeing the firm’s efforts to counter financial crime. That ensures that firms and individuals can be held to account for failing to put proper systems in place to prevent financial crime. If a relevant firm breaches its anti-money laundering obligations, the FCA can take action against a senior manager if it can prove that they did not take such steps as a person in their position can reasonably have been expected to take to avoid the breach occurring. The enforcement action includes fines and disbarment from undertaking regulated activities. The Government have legislated to extend the senior managers regime to apply across all financial services firms. That will be implemented in due course, and will further the Government’s reform programme. All those requirements are additional to the substantive money laundering offences in the Proceeds of Crime Act, such as entering into arrangements that facilitate the use of criminal property, which apply to any individual or company.
As hon. Members know, the Government have previously introduced two similar offences: the failure to prevent bribery, in 2010, and the failure to prevent the facilitation of UK and foreign tax evasion, in 2017. They are structured in a similar way to the proposed new clause, but they were introduced following clear evidence of gaps in the relevant legal frameworks that were limiting the bringing of effective and dissuasive enforcement proceedings. It is right that the offences that we have already established apply to legal entities, regardless of whether they operate in the regulated sector.
The situation in relation to money laundering is very different. The international standard is set by the Financial Action Task Force, which has been referred to numerous times in the Committee’s discussions. The UK’s money laundering regulations apply to banks, financial institutions, certain professional services firms and other types of entity, and act as gatekeepers to the financial system. As I have said, such firms are already required to have policies and procedures in place to prevent their services from being misused for money laundering.
Subsection (6) of new clause 9 would require all companies, regardless of whether they are incorporated, to have procedures in place to prevent persons connected to them from laundering money. The Government do not believe that that would be appropriate. It would risk making non-regulated firms liable for the actions of their regulated professional advisers. Instead, responsibility for anti-money laundering compliance should rest in the regulated sector, as is currently the case. The new clause would not go beyond the existing regulatory framework in that area, and it would blur where responsibility should lie for anti-money laundering compliance. Therefore, I respectfully ask the hon. Member for Oxford East to withdraw the new clause.
Anneliese Dodds
I am grateful to the Economic Secretary for those helpful explanations and clarifications. Despite his useful response, however, there are a number of areas where I am unclear. First, I appreciate that he has probably anticipated this question, but the Committee may ask why it has taken Government a whole year to assess the responses from their consultation on economic crime. Government frequently work at a far faster pace than that. He said that we will have the analysis of those consultation responses in due course. It would be helpful to know more about why it is taking so long for Government to analyse them.
Secondly, the Economic Secretary spoke about the requirement for all regulated firms to ensure that their policies, controls and procedures are appropriate to prevent money laundering, but there is a question about who assesses that and whose responsibility that is. That takes us back to the issue about there being myriad professional bodies, which all operate subtly different approaches towards regulation in this area. As I said, I appreciate that OPBAS has been created to try to draw them together, but I do not think we heard exactly what the status of that office is—I was trying to concentrate on what the Economic Secretary was saying. I have seen different descriptions of it as a team, an office and an organisation. It would be helpful to have a clearer indication, particularly because those professional bodies are, as I understand it, required to contribute financially to OPBAS, so a number of them are keen to understand what is happening with it. Furthermore, HMRC is not a member of it, as I said before, so the concern about a lack of regulatory co-ordination persists.
Finally, the Economic Secretary referred approvingly to the senior managers regime that has been brought in since the financial crisis, which looks like a positive step initially—of course, the HSBC problems occurred following that. In any case, as I understand it, the actual operation of this new regime and its extension are quite different from, for example, what was recommended by the Parliamentary Commission on Banking Standards. Under this approach, the burden to show that senior managers failed to take appropriate steps will be on the regulator, rather than the senior managers themselves.
That is different from the approach taken in many other areas, including road traffic, health and safety at work, the Bribery Act 2010—which the Minister referred to—terrorist legislation, the Misuse of Drugs Act 1971 and so on. It would be helpful to understand why, with the extension of this regime, the burden of proof has essentially now been placed on the shoulders of the regulator, rather than the shoulders of the managers.
Question put, That the clause be read a Second time.
Alison Thewliss
I support the new clauses proposed by the hon. Member for Oxford East. They flag up a huge loophole in the anti-money laundering regime, which is the inability of Companies House to do anything about what comes through its door. By not acting on information, and expecting company formation agents to behave in a different way from the way the Government’s own agency behaves, the Government become complicit in the money laundering that is clearly going on through companies that are registered for only £12.
The situation is curious. Last week I sat on a delegated legislation Committee that discussed passport fees and the need for full cost recovery of those fees by the Government because the Passport Agency wants to ensure that it is not making a loss. There is an argument about whether passports are too expensive, which I think they are, but it costs £12 for the registration of a company. If Companies House is not getting full-cost recovery for that, and that is the reason for not carrying out the due diligence that ought to be done on anti-money laundering, that is an argument to find a reasonable cost of registration that would allow Companies House to operate, make money and have sufficient funds to carry out the due diligence it ought to. If there is an incentive not to play by the rules, and the Government are incentivising that through the operation of their own agency, that is nonsense. That is highlighted in Global Witness’s “The Idiot’s Guide to Money Laundering”:
“Step 4: open your company direct with the corporate registry—they don’t do any checks on you!”
It seems ludicrous that the Government are going to encourage agents who want to set up companies for people to do that and go through the anti-money laundering things that they have to do, but the Government are not enforcing that. That seems absolutely ludicrous. I cannot for the life of me think how the Government will defend that unjustifiable loophole.
Transparency International reported that in the UK last year, 251,628 companies were created with no checks being made on the person setting up the company or their source of wealth. It is a scandal that these companies can be set up, facilitated by the Government, because Companies House has to accept their documents in good faith without doing due diligence checks that we would expect of other agents. If they are not going to support the new clauses, I urge the Government to propose a measure themselves, because this simply cannot continue.
John Glen
The new clauses are broadly similar in purpose and intention. Each would expand the role that Companies House plays in relation to anti-money laundering checks, whether by conducting due diligence directly, confirming that due diligence has been carried out, or confirming that a company seeking to be incorporated has a UK bank account.
I will turn to the practical difficulties of these proposals in a moment, but the first point to make in connection with each is that the UK’s anti-money laundering regime is undergoing an assessment by the Financial Action Task Force. The FATF is the international standard setter in this area and will report publicly later this year on its findings. The report will consider matters, including the effectiveness of how the UK prevents the misuse of legal persons, such as companies, for money laundering purposes. Hon. Members will appreciate that this report will greatly inform the future of the UK’s anti-money laundering regime, including in relation to how we can best prevent the misuse of legal entities, some of which have been described in the course of this debate.
Once the FATF has reported, the Government will actively consider its conclusions, including those in relation to any areas in which the UK’s anti-money laundering framework can be improved. These new clauses pre-empt the review process already under way. It would be more sensible to allow the review to identify specific areas where action is necessary before making further changes to our AML regime.
New clause 10 would require anti-money laundering checks to be undertaken before any UK company can be incorporated by preventing the registrar of companies from registering a company unless she is satisfied that such checks have been carried out. It then says that the registrar is entitled to accept the anti-money laundering registration number of the UK body that has submitted the application as evidence that such checks have taken place. The effect would be to require all incorporations to be made through a UK body regulated for anti-money laundering purposes. This would prevent people from applying directly to Companies House to register and set up their own business; any person seeking to set up a business would be required to use the services of a professional agent that is also regulated for anti-money laundering purposes, and pay for those services, which will in turn increase the cost of setting up businesses.
The proposed new clause assumes that all bad companies are set up directly with Companies House, and that only companies set up through the agency of a regulated professional can be trusted. That is simply not true. Only the simplest companies—those using standard-form constitutions—can be set up directly with Companies House online in the way described by the hon. Member for Glasgow Central. Typically they are self-standing, family-run and family-operated businesses. More complex corporate structures will, in contrast, frequently be established through trust or company service providers. The UK’s national risk assessment of money laundering and terrorist financing noted last year that
“While companies can be registered directly with Companies House, criminals continue to make use of third party TCSPs, to establish the structures within which illegitimate activity subsequently takes place.”
The fact that TCSPs are legally required to conduct customer due diligence does not in and of itself solve the problem. The new clause would therefore impose an across-the-board administrative burden on individuals seeking to establish companies, without adding any significant new obstacles to money laundering. Companies incorporated directly through Companies House are overwhelmingly likely to interact with the UK regulated sector, and so face anti-money laundering checks either by having a UK bank account or through having a UK accountant.
We discussed in the previous debate the 22 different regimes, and this speaks to the necessity for some degree of complexity to minimise the risks as far as possible. New clauses 11 and 12 are similar in outcome to new clause 10: they would require company formation agents—defined for these purposes as including the UK registrar of companies at Companies House—to conduct customer due diligence to establish the identity and risk profile of all beneficial owners of such companies registered at Companies House. The key difference is the reclassification of Companies House, which would now be required to deliver its statutory duties as if it were a private sector business. The accompanying explanatory statement suggests that these clauses will identify the beneficial owners of a company and make information held at Companies House more accurate. Although similar to the proposed new clause 10, these new clauses would go further in imposing expansive new obligations upon Companies House, requiring significant changes to the UK company law system.
Given the overlap with the lead new clause in the group, I will focus on the most novel element: the proposal that Companies House be treated as a company formation agent. Since the registrar of companies was first created, it has been required to accept any application that is validly and correctly submitted, and to duly incorporate the company as requested. Companies House does not help customers through this process, and is responsible solely for conducting the process of company incorporation. Company formation agents, known as TCSPs, are entirely distinct from Companies House. They are already subject to due diligence obligations through the Money Laundering Regulations 2017, and these extend to being required to terminate any existing business relationship when they are unable to meet their due diligence obligations. In contrast, Companies House has no legal right to refuse or decline a request to incorporate a company if the application is valid, and therefore it does not have the ability to decline a business relationship in the way that TCSPs must when they cannot discharge their due diligence obligations. If accepted, these amendments would essentially require fundamental reform of the Companies Act 2006.
To emphasise the scale of that proposed reform, 3.9 million companies are currently registered at Companies House and approximately 600,000 new companies register each year. The impact on resource to carry out due diligence on that number of companies would be considerable. The burdens and cost would fall on those 3.9 million companies, and specifically on the vast majority of legitimate companies, many of which are very small businesses. They would be forced to pay to duplicate the cost of due diligence checks that are already conducted by banks and other regulated professionals. The overall cost to the UK economy could run into hundreds of millions of pounds each year.
New clause 13 would amend part 24 of the Companies Act so as to require UK companies to establish a UK bank account and evidence that to Companies House on an annual basis or pay a fee or financial penalty. As with other new clauses in this group, new clause 13 will not achieve its stated intention. The wider purpose behind that part of the Act is to provide a simple mechanism for companies to confirm that corporate information registered with Companies House, as required under other obligations, is accurate and up to date in relation to company share capital, business activities and the address of a company’s registered office.
That is not to say that the new clause’s underlying principle does not merit further consideration. Evidence of a UK bank account is intended to demonstrate that a company has been through proper money laundering checks by a UK supervising body related to the financial activities of that company. However, the practical implications need careful consideration. To make the proposal operational, Companies House would require new systems with access to UK and international banking information. The costs associated with the development and operation of such systems would inevitably be large and would need to be recovered from UK businesses. Once again, that would necessarily establish a new reporting burden that would essentially target the overwhelming majority of law-abiding UK businesses.
The new clause suggests that companies that cannot provide evidence that they have a UK bank account would be liable to a fee, although that could better be characterised as a penalty—its purpose is not specified. If it is intended to incentivise companies that are established to launder money to open a UK bank account, it would need to be set sufficiently high to achieve that objective, which would be disproportionate to the notional offence of not providing evidence of a UK bank account.
The Government are already active in that sphere. Under the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017, regulated bodies such as banks are obliged to carry out CDD checks on their customers on an ongoing basis. That is a rich field of data, and the regulated sector is already closely engaged with UK law enforcement to identify and report suspicious behaviour. In parallel, Companies House has an extensive outreach programme to the regulated sector to promote use of its data and encourage bodies to report possible errors back to it.
To sum up, a simple demonstration of a bank account is a blunt instrument. As drafted, the new clause simply adds a burden to UK companies to report more information. We should not proceed down that path without being much clearer that the information we require them to disclose is valuable, that it is necessary and that it cannot be achieved by other less burdensome means. On that basis, I ask the hon. Member for Oxford East to withdraw the amendment.
Anneliese Dodds
We tabled the new clause because ineffective anti-money laundering supervision has a clear and obvious link with inadequate compliance and with low and poor-quality reporting of suspicious activity to the National Crime Agency. Research by a number of non-governmental organisations, particularly Transparency International, has indicated serious failings in the current framework for supervising money laundering compliance in the UK, especially with respect to trust and company service providers.
Under the Money Laundering Regulations 2017, only TCSPs carrying on business in the UK—that is their formulation in the legislation—have to register with an anti-money laundering supervisor and comply with MLR 2017. That means of course that TCSPs with no UK presence can incorporate UK companies without any oversight from an AML supervisor. They do not have to comply with UK standards for money laundering checks. We have seen a number of clear examples—I will talk about some in a moment—where that has allowed non-UK TCSPs to incorporate UK companies that have subsequently been used in large-scale money laundering schemes. I think many of the concerns raised a moment ago around undercutting existing legislation and the lack of a fair playing field for UK TCSPs come up again in this regard.
In 2012 the International Consortium of Investigative Journalists showed how a number of UK individuals offering company services had moved their base of operations outside our country but continued to form, and act as nominee directors for, UK companies. There are two examples that are particularly important. The first is Jesse Grant Hester, who was originally from the UK and who moved to Cyprus to form Atlas Corporate Services Ltd before moving to Dubai and, finally, Mauritius—he is somebody who has been lucky enough to travel much in life. Those jurisdictions have all been identified as presenting high money laundering risks. Mauritius in particular is very concerning: it scored 5.92 out of 10 on the Basel Institute on Governance money laundering risk index. Ten is the highest level of money laundering risk and zero is the least, so it is well up there. Jesse Grant Hester appeared on numerous occasions as a nominee director for companies embroiled in corruption scandals. In the Moldovan bank theft that we talked about earlier, he signed fake promissory notes using an alias on behalf of a UK firm, Goldbridge Trading Ltd, allowing £444 million to be stolen. Atlas Corporate Services is associated with eight people who, between them, have held directorships of 3,613 UK companies. Again, that is a staggering number of companies to be held by just eight people. As we discussed, that scandal caused enormous problems for the country of Moldova.
Another UK resident who became internationally renowned, although not in a positive way, for his company formation activities is Ian Taylor. That is not the famous social policy academic, who I had the pleasure of working with, but another Ian Taylor. He also moved around a lot: he moved to Vanuatu.
Anneliese Dodds
Oh, there was a Tory MP as well. Goodness—the name is frequently used. He moved to Vanuatu after he was banned from being a corporate director, first in New Zealand in 2011 and then in the UK in 2015, as a result of his companies’ involvement in numerous scandals, including a land banking scam in Somerset. Vanuatu’s self-assessment on money laundering risk found that its TCSP sector was among the most vulnerable to such activity. In 2015 the Asia/Pacific Group on Money Laundering found serious deficiencies in Vanuatu’s AML system. Despite being banned in the UK, Taylor seems to have retained a UK presence. Various investigations have identified the circle of nominee directors that he works with. One of them is a Vanuatu resident who is a director of more than 61 companies. He took over from Taylor as a director of 20 of them on the same date.
Those examples show that physically moving out of the UK does not result in a lack of activity in the UK. Networks of associates make it difficult to stop the formation of UK companies by individuals who have already been disqualified here. Such individuals, who have been shown to have engaged in money laundering activities or have otherwise been disqualified or viewed as not competent in this arena, can function in other countries and create companies. The checking that should go on does not happen, and there is inadequate anti-money laundering supervision. We do not have a means of dealing with that, because we do not have a regulatory system for TCSPs that are not based in countries with appropriate anti-money laundering provisions. That is not currently illegal, which is why we want to change the legal situation.
John Glen
I am grateful to the hon. Lady for setting out her new clause, which would prohibit TCSPs that do not conduct business in the UK from incorporating UK companies, unless they are overseen by a UK anti-money laundering supervisor. As hon. Members will know, the Money Laundering Regulations 2017 specifically provide for TCSPs conducting business in the UK to be subject to a fitness and propriety test and to register with either Her Majesty’s Revenue and Customs or the Financial Conduct Authority. In borderline cases where it is unclear whether a TCSP is conducting business in the UK—in which case it would be supervised by a UK anti-money laundering supervisor—HMRC would consider on a case-by-case basis whether registration for supervision is necessary. This acts as an anti-evasion mechanism preventing TCSPs from artificially claiming that they are outside the scope of the UK’s anti-money laundering regime.
The hon. Member for Oxford East asked earlier where this was based. The Government recently established the Office for Professional Body Anti-Money Laundering Supervision, known as OPBAS, within the Financial Conduct Authority. It works to secure consistently high standards of AML supervision of professional bodies, including TCSPs. These reforms follow the identification of risks associated with TCSPs in the Government’s 2016 action plan for anti-money laundering and counter-terrorist financing. This found that service sectors such as TCSPs were a significant money-laundering threat.
Although it is for anti-money laundering supervisors to determine their areas of focus, they are required to have regard for the UK’s national risk assessment of money laundering and terrorist financing when assessing risks in their own sector. The risk assessment that the Government published in October last year concludes:
“The highest risk TCSPs are assessed to be UK TCSPs which offer a wide range of services (including nominee directors, registered office services, and banking facilities)”.
Additionally, individual anti-money laundering supervisors are under a duty to identify and assess the international and domestic risks of money laundering and terrorist financing to which their sectors are subject.
Helen Goodman
I am surprised by what the Minister is saying. He obviously did not listen to the BBC “Analysis” programme that was broadcast about three weeks ago on the role of overseas TCSPs. We think it is great when people build real-life factories as a jumping-off point into the single market, but it is evident that TCSPs and banks located in the Baltic states, which do not have such good anti-money laundering regulatory regimes, attract money and are used as a jumping-off point to move that money into the European system. Does the Minister really think that the anti-money laundering regimes throughout the European Union are as effective the one in the UK?
John Glen
I cannot comment on the specific cases that the hon. Lady mentions, because I have not seen or studied them. I imagine that there is a degree of variability in the effectiveness of regimes, but I am trying to set out the Government’s rationale for what we have in place. I do not suggest that it is perfect, but some of the developments have occurred in response to shortcomings that have been identified.
The individual anti-money laundering supervisors are under a duty to identify and assess international and domestic risks, including the money laundering and terrorism risk, which ensures that the most intensive supervision is applied where the highest risks of money laundering exist. The establishment of OPBAS will assist with the consistent identification of such risks across the TCSP sector. Our national risk assessment makes it clear that the Government are aware of the money laundering risks connected with TCSPs, and further reform in the area should take account of the conclusions of the ongoing FATF review. I assure Opposition Members that the regime is a searching and exacting one. I know from ministerial meetings concerning preparations for it that the evaluation will be exacting. We expect the observations to be meaningful, and we will need to respond carefully to them. However, until we receive the outcome of that review of the UK’s anti-money laundering regime and of the experience of OPBAS as its role develops, it would not be appropriate to adopt the amendment.
Hon. Members should be mindful of the fact that anti-money laundering supervision around the world follows a territorial model. Simply requiring non-UK TCSPs to have a UK supervisor when they set up UK companies will not address the challenges of extra-territorial supervision. Effective anti-money laundering supervision depends on measures that include supervisory on-site visits and close engagement with higher-risk firms. Requiring a UK supervisor to do that in relation to a non-UK firm will not, in and of itself, address the issue that hon. Members have identified.
As was noted in the other place, the most effective means of combating international money laundering is cross-border co-operation to drive up the standards of overseas supervision and enforcement. For those reasons, we have imposed a duty on each UK anti-money laundering supervisor to take such steps as they consider appropriate to co-operate with overseas authorities. That is the agenda we pursue through the global FATF process. I therefore respectfully ask the hon. Lady to withdraw the new clause.
Anneliese Dodds
I am grateful to the Minister for those remarks and clarifications. They have been genuinely helpful, but I regret that some areas are still rather unclear to me; perhaps they are not to other Committee members. He stated that the highest-risk TCSPs are assessed to be UK ones, but it has not been spelled out why. Perhaps he could write to me about that.
Anneliese Dodds
I am grateful to the Minister for offering to look into that. We must always be wary of talking about a general pattern of activity as necessarily reflecting the risk profile of that overall activity. Among those TCPS, there could be overseas ones that are not appropriately regulated and that also offer a wide range of services, in the same way as some UK TCSPs do.
I am also a bit confused about the professional regulators. As the Minister said, there are about 22 of them, and then on top of that we stick Her Majesty’s Revenue and Customs, the Financial Conduct Authority and so on. As I understand it, the professional regulators do not have members based in other countries; they cover only UK residents. We are talking about, for example, the Law Society of Scotland and the Law Society of England and Wales—professional bodies dealing with UK individuals. We are not talking about professional associations covering professionals in other countries.
The Minister seemed to talk about a process of liaison between these organisations and their counterparts in other countries. I am sure we all want to encourage that, because it sounds like a very good idea. Information sharing is wonderful, but information sharing is not the same as having an appropriate process of regulation to ensure that there is compliance with anti-money laundering requirements.
The Minister said that the approach was an extraterritorial one, because it affects bodies in other countries. That is absolutely right, but those bodies then interact with our company formation procedure. That is the reason why we, as a country, have a stake in this process—a rather large one, given the reputational damage that seems to be being caused by the activities of some unregulated or inappropriately regulated TCSPs. I will be pressing the new clause to a vote.
Question put, That the clause be read a Second time.
John Glen
I just want to clarify that, while I would not profess to be an expert on Pakistan’s compliance with the FATF, the concerns raised about its recent greylisting were around the specific handling of various banned terrorist organisations. I would not wish to cast any wider doubt over its intentions to improve the provision of services.
Anneliese Dodds
I thank the Minister for that helpful clarification. It is helpful to know the exact locus of FATF activity or the concerns about Pakistan that were focused on terrorist financing. That is not the area we are focused on now, but such financing and money laundering often go hand in hand.
Given the potential effects of such a ruling—we have talked about that in relation to Pakistan—we think it necessary that Ministers should have the flexibility to ensure that FATF standards can be implemented as soon as possible in our country in order to be on top of new international standards. That is particularly important because the UK was a founding member of the FATF, so we need to show that we are at the cutting edge of implementing its requirements.
As I mentioned, we also need to be able to identify or revoke high-risk countries quickly, taking account of the FATF’s standards and given the effect that it can have on the countries themselves and also on our reputation. If we are viewed as not following FATF recommendations, that prevents the co-ordinated approach that the FATF was set up to promote in the first place.
Finally on this amendment, we hope that Ministers will take account of aligning the designations with our EU partners. We have talked consistently in our deliberations about the need for co-ordination, which of course makes all the mechanisms much more effective. When they are not co-ordinated, there can be loopholes. In that regard, it is important to mention the case of Russia. In 2014, the Arms Export Controls Committees—we talked about their composition when we talked about scrutiny arrangements—reported that more than 200 licences to sell British weapons to Russia, including missile-launching equipment, were still in place, despite David Cameron’s claim that the Government had imposed an absolute arms embargo against Russia in alignment with the rest of the EU. We really need to make sure that that alignment is genuine in practice, not just on the surface and rhetorical.
John Glen
New clause 16 would limit amendments to the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 to those that would implement standards published by the Financial Action Task Force, or those whose purpose was identifying or revoking a designation of a high-risk third country. The 2017 regulations transpose the fourth EU anti-money laundering directive, which was in turn derived from the most recent major updates to the FATF standards, which were made in 2012. As the hon. Lady acknowledged, the UK is a founder member of the FATF and is committed to playing a leading role in its continuing work. It is right for the Government to have the power to update the UK regime when such standards change.
There are, however, several areas where the UK’s anti-money laundering regime already goes beyond those standards. Our recently established register of trusts generating tax consequences, for example, goes beyond the standards set by the FATF. Similarly, the UK announced at the time of the 2015 Budget that we intended to regulate virtual currency exchanges for AML purposes—an objective that was accomplished through negotiation of the fifth EU anti-money laundering directive—but that was not required by the FATF. So although we will remain aligned with the FATF standards after the UK ceases to be a member of the EU, our anti-money laundering regime exceeds those standards in certain areas.
The Government are determined to ensure that our defences against misuse of a financial system remain ahead of global standards rather than solely reflecting them. That is reflected in our commitment to the establishment of a public register of the beneficial ownership of non-UK companies that own UK property, which the Committee debated earlier, even if we did not agree on the timeline for it. The new clause would reduce our ability to do so. Under the power in question, the UK’s anti-money laundering regime could not go further in areas where we would otherwise want to.
As I said previously, in debating amendment 7, and as my right hon. Friend the Minister said about new clause 3, we do not believe that a bar on new offences is the right way to address the concerns raised by Lord Judge and others. We have instead tabled amendments to ensure that the power is used only where it is needed, and that Ministers are properly accountable to Parliament for it.
Ensuring that we can make regulations to prevent, or to enable or facilitate the detection or investigation of, money laundering or terrorist financing, as well as to implement the standards of the FATF, is the most certain method of placing future changes to our anti-money laundering system on a sound legal basis. The new clause would limit our ability to do so in the future, and I am sure that is not the intention behind it. I respectfully suggest that the hon. Lady might withdraw it.
Anneliese Dodds
I am grateful to the Minister for his explanation. It may be the fact that we have been in this room for a few hours, but I am struggling a little with, in particular, the suggestion that new clause 16 would somehow tie the UK’s hands in implementing additional requirements beyond the FATF standards.
The Minister referred to the public register of property owned by non-UK entities. We had a discussion about that, but he is right: it would arguably be an innovation in the UK. Of course it is one that we need more than other countries, because of the use of our property market in many such cases, and the exponential rise in house prices. He could have talked—although he did not—about the register of beneficial ownership of companies being an innovation as well, but countries such as the Netherlands and Norway are putting those into practice anyway, so perhaps we are not quite as far-reaching in what we are doing as we might suggest. Particularly in relation to the charges and fines levied against those found guilty of money laundering offences, we seem to be in a different position from that of our North American counterparts, for example, as we have discussed. None the less, it is not clear how the new clause would stop us going further than those other jurisdictions where we wished to do so. It says that we would take account of the
“best international practice including EU sanctions regimes”,
not that we would be led by it.
Sanctions and Anti-Money Laundering Bill [Lords] (Fourth sitting)
John Glen Excerpts(8 years ago)
Public Bill CommitteesRead Full debate Read Hansard Text Read Debate Ministerial Extracts
Richard Benyon
I will not detain the Committee long. The Government have an opportunity to show off their virtue here. Yesterday, we saw the first application of the criminal finance powers to go after the people we are talking about. I gather that yesterday the courts granted us the first unexplained wealth order on a foreign person to freeze £22 million-worth of property assets in London. Within the constraints of what is wise in terms of disclosure, I think that some element of this proposal might be acceptable to the Government, although I feel that it could all be drawn together in a much simpler amendment. I refer to my earlier comments about how I think we should take that forward.
The Economic Secretary to the Treasury (John Glen)
I am grateful to the hon. Member for Bishop Auckland for not seeking to embarrass me again.
Amendment 36 requires the Government to provide quarterly reports on the impact of all sanction regimes, including the number and value of suspected breaches of sanctions. In considering the sorts of scenario that are in play here, hon. Members will remember that sanctions breaches are highly complex and involve multiple parties across various time periods. Sometimes they take place across borders and in different jurisdictions. The complexity of most sanctions breaches means that the investigation process from initial report to action often takes significant time and resources. There is also often a time lag between the breach taking place and being reported. The Government therefore continually adjust their figures as new information comes to light. Hence, it is very challenging to make the process fully accurate. It would be extremely difficult for the Government to report accurately on the number of breaches suspected or found at any one time. That would render the information published in the quarterly reports of little practical value.
The amendment would also place a significant burden on businesses. Currently, the Office of Financial Sanctions Implementation collects information on the value of funds frozen annually, which is onerous on businesses but important for compliance purposes.
Anneliese Dodds (Oxford East) (Lab/Co-op)
I understand that the US Office of Foreign Assets Control routinely releases details of licences and other information. It believes it has achieved an appropriate balance between commercial confidentiality and public accountability, and it does not appear to be overly onerous in the US context. I wonder why we view it as being overly onerous in the UK context.
John Glen
It is not about the reporting, but the frequency of the reporting. The point I am making is that to increase it to quarterly would add unnecessary compliance cost to industry, when that cost is already considerable if necessary. It would also result in an administrative burden for Government to produce figures that may not be of much practical use. We do not think that is the best way to spend the limited resource of public money.
Providing quarterly reporting regime by regime may also risk breaking other laws. At the moment we only provide regime figures for the largest regimes. For the small regimes there may only be a small number of designated persons with frozen funds in the UK so providing that specific information, which can easily be traced back to them, may risk breaching data protection laws.
The Government have already committed to being transparent where appropriate. As part of the monetary penalty guidance published last year by the Office of Financial Sanctions Implementation, the Government committed to publishing details of breaches and criminal prosecutions. That is a matter of public record.
For those reasons, I urge the hon. Member for Bishop Auckland to withdraw the amendment.
Helen Goodman
I am sorry, but notwithstanding the blandishments of the right hon. Member for Newbury, I do not think that the Minister has made the case for keeping that information secret. The fact that the numbers can jump around in the way that they did last month suggests that the Government have not got a grip. One way to incentivise Ministers is through the OFSI, which after all is the body that the Treasury set up to run sanctions policy. We have a whole group of people there devoting their lives to that—perhaps they are even in room, supporting the Minister today—and to supporting Ministers to do that. It is a perfectly reasonable piece of information for us to be requesting. It would help Ministers to manage things better and help to give the public confidence that breaches of sanctions are being dealt with properly. I am afraid that I therefore wish to press the amendment to a vote.
Question put, That the amendment be made.
Alison Thewliss
I am concerned about the use of the word “may” in the clause, which states that the guidance “may include guidance” about certain things. I am concerned that that is not sufficiently well developed. I very much support the hon. Member for Bishop Auckland’s amendments, which would add a wee bit more clarity, detail and guidance. The clause is worth while, but the Government would do well to listen to the detail that she laid out.
John Glen
I am grateful for those questions. I am a little confused, because both hon. Members referred to clause 36, which states, “An appropriate Minister may,” but I thought these amendments were pursuant to clause 37, which states in subsection (1) that
“the appropriate Minister who made the regulations must issue guidance”.
I acknowledge that these amendments are about guidance. We have just agreed clause 36, which states, in subsection (1),
“An appropriate Minister may make regulations”.
The two amendments as tabled by the hon. Member for Bishop Auckland are on clause 37, subsection (1) of which states
“the regulations must issue guidance”.
Alison Thewliss
We seem to be at cross purposes. The amendment is about the line further to that; subsection (2) states, further to “regulations must issue guidance”, that
“guidance may include guidance about”.
It is about the expansion of what that guidance may be.
John Glen
I am very grateful for that clarification. I hope that I will be able to address that in my remarks and give sufficient reassurance about the Government’s plan.
I should make clear from the outset that the Government are in favour of good guidance and we intend to produce it. It is in the Government’s interest to produce thorough guidance, to improve sanctions implementation and to ensure that sanctions can be enforced robustly. It was clearly set out that amendment 27 would require Government to provide guidance on the definition of ownership and control on the face of the Bill.
Hannah Bardell (Livingston) (SNP)
Further to the points made by my hon. Friend the Member for Glasgow Central about the efficacy of these amendments, Governments come and go, and I fully appreciate that the Minister is committed to giving proper guidance, but with the greatest respect, his party may not always be in power. Is it not important that if they have the intention, they should put these things on a statutory footing?
John Glen
I will address those points in my remarks, and I will be happy for the hon. Lady to come back if she is not content at the end.
Amendment 28 would broaden the scope of guidance to areas such as providing best practice on compliance with financial sanctions and establishing effective banking and payment corridors. As I said at the start, the Government are committed to producing clear and accessible guidance on sanctions implementation and enforcement. Clause 37 requires Ministers to issue guidance about any prohibitions and requirements imposed by sanctions regulations. There is already a mandatory requirement to provide comprehensive guidance for all those affected by sanctions and implementation.
The Government have been consulting extensively; across Whitehall, they have been meeting with NGOs and financial institutions that have asked for this guidance. I can reassure the Committee that we will give them what they have asked for. The Government do not believe that further amendments to clause 37 are needed to provide the type of guidance sought on “owned” and “controlled” in amendment 27. Where sanctions regulations contain prohibitions or requirements about entities that are owned and controlled by a designated person, we are already under a duty to issue guidance. I can reassure hon. Members that the Government already provide guidance on ownership and control and will continue doing so.
The additional guidance sought in amendment 28 would greatly extend the scope of the guidance to specific areas such as mechanisms to limit the impact of prohibitions and requirements on civilian and humanitarian activity, and establishing effective banking and payment corridors. Although I can understand the concerns of NGOs that lie behind this amendment, some of them clearly are beyond the remit of the Government to provide. For example, the Government do not have the powers to require banks to make payments on behalf of particular customer or to open new payment channels. Although I appreciate the spirit of the amendments, the Bill already caters for them in so far as it addresses matters within the Government’s control. Adding extra text to the Bill will only create confusion.
Alison Thewliss
Does the Minister not agree that it is in the public interest for the Government to support payment channels being created? If, for example, there is a Disasters Emergency Committee emergency appeal and the NGOs gather lots of funds, but those funds cannot reach the beneficiaries because there is no appropriate payment channel that gives everybody reassurance, surely it is in the Government’s interest to make that happen.
John Glen
I acknowledge what the hon. Lady says, but this is a non-exhaustive list. We intend to issue guidance on those issues listed in the Bill and more, as new issues evolve. We may also not need guidance in some areas that the sanctions do not cover. Where we are at cross purposes here is that people think the list is exhaustive when it is enabling and allows the Government to give the necessary guidance as required and as circumstances evolve.
We understand the concerns behind the amendments and have worked closely with NGOs to understand their needs, and we will continue to do so.
Hannah Bardell
I appreciate the Minister’s response to my hon. Friend the Member for Glasgow Central, but if he does not think it is the Government’s role to create those channels, whose role is it?
John Glen
I am not necessarily denying the role of Government in issuing guidance in a whole range of areas. What I am dealing with here is the necessity of adding the provision into the Bill when the need to give guidance is sufficiently catered for in the text of the Bill.
The Bill will put the requirements in a better place because of the new flexibility on exemptions, licensing grounds and the ability to provide general licences. We are therefore unable to agree to the level of guidance sought, and I ask the hon. Member for Bishop Auckland to withdraw her amendment.
Helen Goodman
I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Clause 37 ordered to stand part of the Bill.
Clause 38 ordered to stand part of the Bill.
Clause 39
Revocation and amendment of regulations under section 1
Amendment made: 6, in clause 39, page 30, line 24, leave out “(d)” and insert “(h)”—(Sir Alan Duncan.)
The provision amended here is a condition which applies to the power to amend regulations made under Clause 1 which state a purpose within Clause 1(2). The amendment expands the reference to Clause 1(2) so that it covers paragraphs (e) to (h) of Clause 1(2) (as well as paragraphs (a) to (d)).
Clause 39, as amended, ordered to stand part of the Bill.
Clause 40 ordered to stand part of the Bill.
Clause 41
Power to amend Part 1 so as to authorise additional sanctions
Question proposed, That the clause stand part of the Bill.
Alison Thewliss
The hon. Lady has already said much of what I was going to say, so I am sure that, if that I am a bit briefer, that will be okay with everyone. We have serious concern about SLPs, and the Bill provides an opportunity to do something about it. When we know there is a problem and an opportunity to put it right, it would be negligent of us as parliamentarians to look the other way.
I understand that, even in the new regime where people with significant control should be registered, up to December 127 or so SLPs had registered via law firms, but 489 had registered via anonymous mailbox addresses, which means that the people with significant control are not there, are barely identifiable and are very hard to trace. We know from recurring stories in The Herald worked on hard by David Leask and the researcher and expert in this field, Richard Smith, that such companies keep the issues, scandals and money laundering behind the scenes, and that it keeps going on. We therefore need to do everything we can in every area to tackle these problems.
There is the broader issue of SLP non-compliance and the inadequacies of Companies House, which we may speak about later in our proceedings. Not having a postcode when registering a company should be a pretty simple compliance issue—the process could be stopped at that point, never mind going into the more technical detail. We therefore need to look at this issue carefully. Never mind all the overseas territories; we are allowing it to happen here, in this country, behind mailboxes in Scotland. Frankly, that is unacceptable. We need to do something about it. If we continue to let it go, the problem will not go away.
We can talk about how we might go ahead with this issue in terms of enforcement, because other countries have tackled it. My colleague Roger Mullin and others have worked on it for many years, and we should take the opportunity to look at it here and now. If the Government are not willing to accept any of the amendments, I urge them to table their own and not to let the opportunity pass.
John Glen
I am grateful to both Front-Bench spokespeople for their speeches, and I will try to address the detail of the points they raised. The essence of the case made by the hon. Member for Oxford East was about whether the Bill covers SLPs. First, I draw attention to clause 9(5), which confirms that “person” includes individuals, corporate bodies, unincorporated bodies, organisations and
“any association or combination of persons.”
The Bill therefore does include SLPs, and we can make anti-money laundering provisions for them.
Hannah Bardell
Does the Minister recognise the reputational damage to Scotland? We have a Liberal Chancellor to thank for that, but it is very important that we make these changes, because Scotland’s reputation is being damaged through no fault of its own and by legislation over which we have no power.
John Glen
Absolutely, and that is why it is important that the UK Government act. In June last year, Scottish limited partnerships were brought into the scope of the public register of corporate beneficial ownership maintained by Companies House. That was welcomed by the former Member for Kirkcaldy and Cowdenbeath, who is a leading campaigner on the issue, as was mentioned earlier. He said it was
“the first practical recognition SLPs have been a significant problem”.
That reform further required SLPs to submit an annual confirmation statement that information held on the register is accurate, and to keep the information updated on an ongoing basis. In cases of non-compliance with the duties to deliver information about people with significant control—PSC information—to Companies House and to keep it up to date, officers of Scottish limited partnerships convicted on indictment can face a sentence of up to two years’ imprisonment, a fine, or both.
Additionally, the Department for Business, Energy and Industrial Strategy sought views last year on whether changes need to be made to limited partnership law to further address the concerns that have been raised about misuse of structures, including Scottish limited partnerships. Responses to that call for views are being analysed and options for reform actively considered. BEIS will announce its next steps shortly, and after a response to the call for evidence is published, identified options for reform will be subject to public consultation in the usual way. That process will be used to inform any necessary further reforms to the UK’s treatment of limited partnerships, including Scottish limited partnerships.
I hope that I have addressed in detail the range of concerns about Scottish limited partnerships.
Alex Norris (Nottingham North) (Lab/Co-op)
Does the Minister feel that it is possible for just 20 Companies House staff to have oversight of perhaps 400,000 entities under these arrangements?
Jo Stevens (Cardiff Central) (Lab)
Is the Minister aware that Companies House has been making large-scale redundancies for the past few years?
John Glen
The issue is really about the effectiveness of the regime. As I said, it is matter of what BEIS determines it needs to do to address the problem. Clearly, questions can be asked about the plans that will be put in place when they are forthcoming.
As clause 43 already gives the Government the power to make provision for the purposes of combating money laundering by Scottish limited partnerships, I ask the hon. Member for Oxford East to withdraw the amendment.
Anneliese Dodds
I am grateful to the Minister for his comments. I know that he is a very sincere and engaged Minister, but I am concerned that the direct questions that we levelled have not been answered. We asked for an indication of exactly how many of these SLPs had provided that beneficial ownership information. We asked for an update on that, but we have not had it. I also asked for an indication of how many of these SLPs have been prosecuted; I did not receive that, either. I did not receive an indication of how many have been fined under this new regime, which was set up last June. Surely we have had a number of months of operation of that new regime in order to adjudge whether it is truly effective.
I appreciate what the Minister said about BEIS conducting a review, but if the existing system is not working correctly, or if we have doubts about its operation, given the huge damage that these structures already seem to have inflicted, surely we need to have a reference to them in the Bill? We need to show that we are taking this matter seriously, and particularly that the Westminster Government are taking it seriously, in the light of comments from Government figures in other nations and their concerns about the use of SLPs.
I give the Minister one last chance to answer those questions and give that information: the number of prosecutions, the number of fines, and the number of SLPs indicating beneficial ownership information. If we do not get that information, we will have no choice but to press our amendment to a vote.
Anneliese Dodds
I wish to press the amendment to a vote.
Question put, That the amendment be made.
John Glen
I beg to move Government amendment 7, in clause 43, page 33, line 13, leave out subsection (2).
This amendment removes the provision that prevents contraventions of regulations under Clause 43 (money laundering and terrorist financing etc) from being enforceable by criminal proceedings.
In moving this amendment, I acknowledge the recognition that this House has given to the importance of a rigorous anti-money laundering regime. To ensure the robustness of future anti-money laundering regulations, corresponding powers to create criminal offences are necessary. At the same time, I recognise that Lord Judge and others in the other place expressed significant concerns about the scope of criminal offence powers in the Bill upon its introduction. It is important to note that those concerns were not about the existence of offences for breaching anti-money laundering regimes; instead, they were concerns about the unchecked ability of Ministers to create offences.
The amendment reinstates the power to create criminal offences, while the package of amendments as a whole directly addresses those concerns through additional safeguards, which narrow the scope of and the ability to use these powers. I shall elaborate upon these safeguards, which the Government have discussed with Lord Judge since the passage of this Bill through the other place, and then I will turn to amendments 10, 11 and 12. Before I do so, however, it would be useful to consider how anti-money laundering regulations have operated with criminal offence powers in the past.
In accordance with standard practice, when implementing EU directives on money laundering, criminal offences in this area have been created by Ministers in secondary legislation made under the powers in the European Communities Act 1972. That was done under the negative procedure, with no prior consultation with Parliament and no need to seek Parliament’s consent. That position will be improved for future money laundering regulations made under the Bill. They will now be made under the draft affirmative procedure, so Parliament will consider and vote on them before they come into force. Using the affirmative procedure is a direct response to the concerns raised, to ensure that where changes need to be made, they will be properly scrutinised.
Criminal offences were created by both the Money Laundering Regulations 2017 and their predecessors, the Money Laundering Regulations 2007, which were brought into force by the then Labour Government. As hon. Members can see, the approach has been supported on a cross-party basis in the past. The detailed provisions in such regulations set standards and procedures for regulated businesses. They are designed to prevent money laundering and terrorist financing and to help law enforcement authorities to investigate those crimes, and should also be seen in the context of a separate penalty regime for the key substantive money laundering offences. Such offences are established under part 7 of the Proceeds of Crime Act 2002, which provides for more punitive prison sentences of up to 14 years, for example for those guilty of directly laundering the proceeds of crime. Money launderers are typically prosecuted through those offences as they allow for longer sentences.
Without the power to create new criminal offences in secondary legislation, the enforceability of new regulations would be seriously weakened. That would dramatically lower the effectiveness of the UK’s anti-money laundering regime. More generally, it is not unusual for requirements to be set in delegated legislation that can be enforced using criminal penalties, In the area of financial services, for example, the regulated activities order, made under the Financial Services and Markets Act 2000, specifies which activities are or are not regulated. Carrying on such activities without permission from the regulator is a criminal offence. It remains the position of the Government that it is neither unusual nor improper for Parliament to confer powers of that type to Ministers.
Helen Goodman
I just want to clarify with the Minister the status of his conversations with Lord Judge. I do not know if he was trying to give us the impression that Lord Judge had agreed the amendments. I felt on Tuesday that he was trying to give that impression, so I spoke to Lord Judge, who told me that he had indeed had conversations with Ministers, but he did not say to me that he had approved the amendments. Is the Minister now trying to tell us that Lord Judge has agreed Government amendment 7?
John Glen
What I can tell the Committee is that officials have had sensitive conversations with Lord Judge. It is not for us to presume the outcome of his deliberations at this point. I am setting out what we have discussed and the consequence of those discussions. Clearly, Lord Judge will make his position known in his own way in due course.
I would like to set out why the ability to create criminal offences for the UK’s anti-money laundering regimes is necessary. The issue has been considered previously, when the Government consulted specifically on whether to remove the criminal offence provisions in the Money Laundering Regulations 2007. The British Bankers Association stated that removing such provisions would be at odds with the objective of driving an effective anti-money laundering regime.
Further, the Crown Prosecution Service argued that provisions for creating criminal offences in the Money Laundering Regulations that are different from those of the Proceeds of Crime Act 2002 serve a separate and useful function in tackling money laundering. In some instances, prosecuting according to the Proceeds of Crime Act could jeopardise ongoing investigations. It said that in such cases, the ability to prosecute for a regulatory offence relating to defective anti-money laundering counter-terrorist financing systems can be an important tool. Finally, HMRC noted in response to the same consultation that abolishing criminal sanctions for breaches of regulations carries significant risk to its ability to tackle money laundering.
Anneliese Dodds
I am grateful to the Minister for his clarification. I do not want to go around the houses again, as we did at some length on Tuesday. I am grateful to my hon. Friend the Member for Bishop Auckland for explaining why we are concerned about the lack of accountability in general for measures imposing criminal sanctions throughout the Bill. I recognise what the Minister said about this being a separate regime; it is obviously not the same one as is applied in the case of sanctions. The offences that can be applied are lesser in their extent—for example, we are talking about shorter prison sentences in the Bill—but we still have many of the same concerns that we expressed previously.
There has been some shift on the part of the Government, but I suppose it is difficult for any of us to judge whether the spirit of Lord Judge has been complied with, or whether there has merely been some kind of interpretation of a clutch of some of his words. Certainly we will look at what is written on the tin, but to us it does not appear to constitute recognition of the concerns expressed or the kind of meaningful engagement that we need. We are doing something very significant in the Bill, which in effect creates de novo a sanctions and anti- money laundering regime. Much stronger accountability is needed than is in the Bill, even as amended by the Government. We have the same concerns as we expressed previously, so we will resist the amendment.
John Glen
I acknowledge the outstanding concerns. I think I have set out clearly the rationale, why we need the provisions and how they respond suitably to Lord Judge’s concerns. I acknowledge the genuine difference of opinion, but I have set out the Government’s position and it is now for the Opposition to do as they wish.
Question put, That the amendment be made.
John Glen
I beg to move Government amendment 10, in schedule 2, page 53, line 32, leave out paragraph 15 and insert—
“15 Make provision—
(a) creating criminal offences for the purposes of the enforcement of requirements imposed by or under regulations under section 43, and
(b) dealing with matters relating to any offences created for such purposes by regulations under section 43,
but see paragraphs 18 and 19.”
This amendment, read with Amendment 12, makes clear that any offences included in regulations under Clause 43 must be for the purposes of enforcing requirements imposed by or under regulations under Clause 43 or (while they remain in force) the Money Laundering Regulations 2017.
John Glen
Amendment 10 is a consequence of the proposed new paragraph 20A, which will be inserted by amendment 11. Paragraph 20A(1) refers to offences created for the purposes of the enforcement of requirements imposed by or under regulations under clause 43.
The amendment further narrows the powers for future regulations to make provision for new criminal offences, as I referred to in the discussion on the previous amendment, as compared with the Bill when it was first introduced in the other place. It would make the powers subject to the requirement for a report to Parliament, along the same lines as amendments to part 1 of the Bill. That report would identify the offences created and their respective penalties, and would confirm that the Minister has considered that there are good reasons for creating those offences and setting the penalties at the levels at which they have been set. It would ensure that the Minister does not use the power lightly and is fully accountable to Parliament for doing so.
I take the opportunity to remind hon. Members that these safeguards are contained in Government amendment 11, to which I will turn shortly. These amendments are part of the wider package that inserts safeguards on the use of this power, and have been designed to directly address the concerns raised by Lord Judge and others in the other place.
The amendment restricts the scope of the power to create future offences to offences created for the purposes of enforcing future anti-money laundering regulations. Amendment 12 ensures that references made to regulations made under clause 43, with respect to paragraph 15 of schedule 2, and requirements imposed by regulations made under clause 43, with respect to paragraph 20A of schedule 2, also include reference to, or requirements imposed by, the Money Laundering Regulations 2017. That ensures that the safeguards proposed by Government amendment 11 will also apply to possible future changes made to the 2017 regulations.
The amendment ensures that it is possible for new money laundering offences to be created by amending the 2017 regulations. It will therefore enable the Government to create new offences in order to respond to, for example, emerging risks identified by the national risk assessment of money laundering and terrorist financing, which was published in October 2017, or in response to the ongoing review of the financial action taskforce of the UK’s anti-money laundering and counter-terrorist finance regime. When the Government do so, using the powers contained in clause 43, the enhanced procedural protections set out in the amendment will apply.
Anneliese Dodds
I am grateful to the Minister for that explanation. First, in relation to Government amendments 10 and 11, the Opposition would like the accountability provisions to be much more extensive than they are. However, given that the Government just won the last vote on an amendment, it would be rather self-defeating for us to oppose these amendments at this stage.
I have a question on Government amendment 12; perhaps the Minister can enlighten us a little bit. I understood that the whole Bill, when it comes to its money laundering provisions, amends the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017. I am therefore slightly confused about the timing and scheduling. Why are the Government bringing those regulations into the Bill when they were not there in the first place? I wonder whether the Minister can enlighten us.
John Glen
This is an enabling measure that allows us to take the action necessary. I am not sure I quite grasped the hon. Lady’s point. I think I will need to write to her to clarify that so that I do not say anything that misrepresents the Government’s position.
Amendment 10 agreed to.
John Glen
I beg to move amendment 11, in schedule 2, page 54, line 11 at end insert—
“20A (1) In this paragraph ‘relevant regulations’ means regulations under section 43 which create any offence for the purposes of the enforcement of any requirements imposed by or under regulations under section 43.
(2) The appropriate Minister making any relevant regulations (‘the Minister’) must at the required time lay before Parliament a report which—
(a) specifies the offences created by the regulations, indicating the requirements to which those offences relate,
(b) states that the Minister considers that there are good reasons for those requirements to be enforceable by criminal proceedings and explains why the Minister is of that opinion, and
(c) in the case of any of those offences which are punishable with imprisonment—
(i) states the maximum terms of imprisonment that apply to those offences,
(ii) states that the Minister considers that there are good reasons for those maximum terms, and
(iii) explains why the Minister is of that opinion.
(3) Sub-paragraph (4) applies where an offence created by the regulations relates to particular requirements and the Minister considers that a good reason—
(a) for those requirements to be enforceable by criminal proceedings, or
(b) for a particular maximum term of imprisonment to apply to that offence,
is consistency with another enactment relating to the enforcement of similar requirements.
(4) The report must identify that other enactment.
(5) In sub-paragraph (3) ‘another enactment’ means any provision of or made under an Act, other than a provision of the regulations to which the report relates.
(6) In sub-paragraph (2) ‘the required time’ means the same time as the draft of the statutory instrument containing the regulations is laid before Parliament.
(7) This paragraph applies to regulations which amend other regulations under section 43 so as to create an offence as it applies to regulations which otherwise create an offence.”
This amendment requires that where regulations under Clause 43 are made which include offences, a report specifying the offences and giving reasons for any terms of imprisonment that apply to them must be laid before Parliament.
As I said earlier, amendment 11 provides for an important safeguard that will apply when powers are used to create criminal offences. It will require the Government to lay a report before Parliament explaining the Minister’s reasons for using the powers—amendments 10, 11 and 12 are really a package—whenever a criminal offence is created in new or amended anti-money laundering regulations under clause 43.
The amendment requires such a report to be laid at the same time as the draft statutory instrument containing the relevant regulations. Regulations under clause 43 will of course be made using the draft affirmative procedure, unless they update the UK’s list of high-risk jurisdictions in connection with which enhanced due diligence measures are required. The report will therefore facilitate effective parliamentary scrutiny of changes to the UK’s AML regime and will go further than the status quo in enabling Parliament to scrutinise the creation of criminal offences through money laundering regulations.
The amendment specifies that the following elements should be included in the report: the offences that have been created and the requirements to which they refer; the good reasons why those requirements need criminal offences; the maximum prison terms for any offences created that are punishable by imprisonment; the good reasons for setting the maximum prison terms at the levels at which they have been set; and, where the creation of an offence is justified by reference to an existing offence in another enactment, reference to that other enactment.
The requirement for the Minister to demonstrate that they have good reasons for using the power ensures that it cannot be used lightly. I hope hon. Members agree that such reports will provide increased transparency about the reasons for creating criminal offences and give Members a solid basis for holding the Government to account when debating anti-money laundering regulations made under the Bill.
Nevertheless, the Government remain very aware that creating criminal offences and setting penalties in regulations is a serious matter that is not to be undertaken lightly. I am therefore happy to repeat reassurances and existing safeguards that the Government introduced in the other place. As it stands, a criminal offence can be established under clause 43 only if regulations provide either a mental element necessary for the commission of the offence or a defence to it, or both. That will maintain the existing policy position under the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 and preserve the deterrent effect established by criminalising breaches of anti-money laundering and terrorist financing regulations.
The amendment is an additional safeguard to the changes the Government have already introduced in response to concerns raised in the other place by Lord Judge and others. We listened to those concerns, and the amendment addresses them. It will ensure that Ministers cannot create criminal offences or set penalties —up to a maximum of two years’ imprisonment—without good reasons, and that Parliament has all the information it needs to hold Ministers to account.
That contrasts starkly with current practice, in which new criminal offences are created through statutory instruments made under section 2(2) of the European Communities Act 1972 under the negative procedure, without any need to state reasons, with no information about such reasons being provided to Parliament, and with no requirement for a vote in Parliament to approve them. The measure is, therefore, a better way of ensuring that proper safeguards are placed in the Bill with respect to offences, rather than removing the ability to create them, and so weakening the UK’s anti-money laundering regime.
Anneliese Dodds
I am grateful to the Minister for his comments. I shall not dwell on the matter, because we have already talked about the amendment to an extent in a previous debate. I repeat our concern that the regime is not sufficiently accountable. Reference to the previous regime may be inappropriate, because the framework in that case was set at EU level, and it was a question of implementing it in the UK. Surely with the brave new dawn that some see coming as we leave the EU, we should be aiming at a system that is as accountable as possible.
In our previous discussions about offences in relation to sanctions, Ministers suggested that there could be a need for speed in the creation of new regimes or new types of criminal offence, because, for example, a human rights challenge could arise suddenly, or there could be gross violations of human rights in a particular country, and we might need to respond quickly. Surely such a situation does not apply to money laundering. It is peculiar that the same almost fast-track, post hoc style of system should be applied to criminal offences to do with money laundering. It would be helpful to have more information about why the Government believe that in the relevant category of criminal offence, there cannot be the same—or at least movement towards the same—degree of scrutiny as there would be in other contexts, when the question of speed surely does not apply. In fact, the Minister did not mention speed.
John Glen
I take the hon. Lady’s concerns seriously. As my right hon. Friend the Minister said earlier, when we were discussing similar matters on Tuesday, we should be happy for hon. Members to meet officials to discuss outstanding concerns. I have set out in the amendments a clear affirmative process for laying a statutory instrument before the House, in a situation where Parliament will be able to discuss the requirement and its extent, the underlying rationale, and a mechanism for reporting to Parliament. If there are particular issues and specific cases that the hon. Lady wants to raise, I suggest that we convene a conversation with officials to deal with them. As we move forward, I am keen to secure the widest possible support and consensus about the Bill.
Amendment 11 agreed to.
Amendment made: 12, in schedule 2, page 54, line 39, at end insert—
‘( ) In paragraph 15 (offences), any reference to regulations under section 43 includes the Money Laundering Regulations 2017.
( ) In paragraph 20A (report in respect of offences)—
(a) the reference in sub-paragraph (1) to requirements imposed by or under regulations under section 43 includes requirements imposed by or under the Money Laundering Regulations 2017, and
(b) the reference in sub-paragraph (7) to other regulations under section 43 includes the Money Laundering Regulations 2017.”—(John Glen.)
This amendment has the effect that, while the Money Laundering Regulations 2017 remain in force, offences may be created by regulations under Clause 43 for the purposes of enforcing requirements in the 2017 regulations.
Schedule 2, as amended, agreed to.
Ordered, That further consideration be now adjourned. —(Mike Freer.)
Draft Building Societies (Restricted Transactions) (Amendment To The Prohibition On Entering Into Derivatives Transactions) Order 2018
Draft Financial Services Act 2012 (Mutual Societies) Order 2018
Draft Co-Operative And Community Benefit Societies Act 2014 (Amendments To Audit Requirements) Order 2017
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The Economic Secretary to the Treasury (John Glen)
I beg to move,
That the Committee has considered the draft Building Societies (Restricted Transactions) (Amendment to the Prohibition on Entering into Derivatives Transactions) Order 2018.
The Chair
With this it will be convenient to consider the draft Financial Services Act 2012 (Mutual Societies) Order 2018 and the draft Co-operative and Community Benefit Societies Act 2014 (Amendments to Audit Requirements) Order 2017.
John Glen
It is a pleasure to serve under your chairmanship, Mr Robertson, for I think my first time as a Minister. Today’s three orders relate to the mutuals sector, which encompasses co-operatives, community benefit societies, credit unions and building societies.
In the mutuals sector, the interests of members, not shareholders, are paramount—hence mutuals offer a viable and accessible finance alternative to millions of British people. Mutuals are an important part of Britain’s diverse and resilient economy, and we wish to keep it that way. Building societies are responsible for 27% of mortgages and hold 21% of the UK’s savings, and they offer important diversity and competition in the financial services sector. Their mutual structure means that members own the business, and all profits are returned to them rather than any shareholders. That gives them the ability to provide members with a more bespoke service. Credit unions are another mutually structured financial institution, offering their 2 million members affordable and responsible credit, savings and financial education, particularly focused on lower-income and financially excluded people.
Mutual societies allow millions of UK consumers to access the financial services that they need on a daily basis. This issue is very close to my heart—I am a passionate advocate for responsible capitalism and ensuring that the financial services sector does its bit. That is why I am chairing the Government’s financial inclusion policy forum with the Pensions and Financial Inclusion Minister, my hon. Friend the Member for Hexham (Guy Opperman). The forum will look at what more can be done to ensure that individuals, regardless of their background or income, have access to affordable financial products and services.
We are here today because the Government have introduced a package of measures to provide further support for the sector, and to help to level the playing field between mutuals and companies. The proposed legislative package does multiple things: it helps to reduce burdensome auditing requirements for co-operative societies; it allows building societies to join central clearing houses; and it consolidates the registration and regulation of Northern Irish credit unions. Those measures have all been requested by representatives of the mutuals sector and are practical ways for the Government to support it.
I will first introduce the Co-operative and Community Benefit Societies Act 2014 (Amendments to Audit Requirements) Order 2017. There are nearly 7,000 co-operatives in Britain today, which together contribute more than £36 billion to the UK economy. Those co-operatives employ more than 200,000 people and are part-owned by 13.6 million members of our society. The Government recognise the value of co-operatives and the need to ensure that their administrative requirements are proportionate and that they are not disadvantaged compared with companies of comparable size.
Since 2012, small companies have enjoyed an exemption from the requirement in the Companies Act 2006 to have their accounts fully audited. The order will increase the thresholds at which co-operatives are required to appoint a professional auditor, bringing their auditing requirements in line with companies legislation, which had its auditing threshold increased to keep pace with inflation. That means that co-operatives will enjoy a more proportionate auditing regime, but I should note that appropriate controls remain in place: members must vote to apply the exemption—they are not obliged to do so—and the regulators can still demand a full audit if they have concerns about the management of the co-operative. Furthermore, co-operatives that disapply the requirement to appoint a professional auditor will still be required to prepare a less onerous audit report. That will help co-operatives to save money and ensure that they are not saddled with unnecessary administrative burdens.
The next draft order before the Committee relates to building societies. Building societies serve more than 20 million UK customers and are an integral source of loans to first-time buyers, providing £2.9 billion in net mortgage lending in the last quarter. That constitutes a 27% market share of total net lending. In order to offer fixed-rate mortgages safely, building societies must hedge against the risk of interest rate changes, and may do so by buying derivatives.
The European market infrastructure regulation of 2012 requires all derivatives to be centrally cleared, which means that building societies must either become direct members of a clearing house or clear through third-party members. In practice, however, the legislation works to prevent building societies from complying with the membership rules of the main UK clearing house. As a result, building societies must clear indirectly through third parties that are members, incurring expensive broker fees and placing them on an uneven footing compared with other financial institutions.
The draft order will amend the Building Societies Act 1986 to allow building societies to trade derivatives—not only to hedge their balance sheet but to comply with the membership rules of a clearing house. That will help building societies to reduce costs and manage risks more effectively, all of which will support them to compete on a level playing field in the mortgage market.
The last draft order before the Committee concerns mutuals in Northern Ireland, including credit unions. Under the Financial Services and Markets Act 2000, mutuals in Great Britain are registered with, and regulated by, the Financial Conduct Authority and the Prudential Regulation Authority, and previously by the Financial Services Authority. Following the failure of the Presbyterian Mutual Society in October 2008, at a cost to the taxpayer of £50 million, Northern Ireland Ministers and the Treasury agreed that responsibility for regulating Northern Ireland credit unions and other mutuals should transfer to the FSA. Responsibility for that regulation was actually transferred in 2011. The aim of that transfer was to provide members of those mutuals with access to the Financial Services Compensation Scheme and the Financial Ombudsman Service, among other benefits.
Today we are completing that work by consolidating the registration and regulation of Northern Ireland mutuals by the FCA and the PRA. A good deal of preparatory work has now taken place, and officials from the Department for the Economy and the Foreign Office are working together closely to ensure that Northern Ireland’s mutuals are supported during the transfer or registration. Societies previously registered with the Department for the Economy will not have to re-register; their records will simply transfer to the FCA. The draft order will create a more sensible regulatory and registration regime for Northern Irish mutuals. It is clearly logical for registration and regulatory oversight to lie with a single authority, as it reduces complexity and red tape for both the mutuals and the regulators.
I trust that the Committee will agree that the draft orders are a welcome update to mutuals legislation, for the wider benefit of the sector across the country. I commend them to the Committee.
John Glen
I am grateful to the hon. Gentleman for his observations. I will seek to ensure that that letter is relayed to him and his Front-Bench colleagues.
On the specific question of the failure of a clearing house, since the financial crisis, the expansion of clearing has played a major part in the reforms to make derivative markets more transparent and resilient, and the UK has worked with global partners to develop international principles in regulating clearing houses to ensure that they are robust. The scenario the hon. Gentleman suggests is extremely unlikely. The strictest standards have been agreed to ensure that clearing houses are resilient and their members are protected, even in periods of extreme market distress. The Bank of England and the European Securities and Markets Authority conduct regular stress tests on the clearing houses and have found that they would remain solvent under the most severe extreme market scenarios, including the last financial crisis. I would respectfully submit that the situation the hon. Gentleman suggests is so unlikely to happen as to not be realistic, but it would be a matter for the PRA, the FCA and the Bank of England to deal with, in a crisis that I cannot foresee.
In the spirit of trying to abbreviate the proceedings as reasonably as I can, and given the widespread agreement, which I had hoped for on laying these measures before the House, I will now conclude. I hope that the Committee will agree to them.
Question put and agreed to.
DRAFT FINANCIAL SERVICES ACT 2012 (MUTUAL SOCIETIES) ORDER 2018
Resolved,
That the Committee has considered the draft Financial Services Act 2012 (Mutual Societies) Order 2018.—(John Glen.)
DRAFT CO-OPERATIVE AND COMMUNITY BENEFIT SOCIETIES ACT 2014 (AMENDMENTS TO AUDIT REQUIREMENTS) ORDER 2017
Resolved,
That the Committee has considered the draft Co-operative and Community Benefit Societies Act 2014 (Amendments to Audit Requirements) Order 2017.—(John Glen.)
Oral Answers to Questions
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Imran Hussain (Bradford East) (Lab)
The Economic Secretary to the Treasury (John Glen)
The Government are taking a proactive approach to support borrowers, to aid people to manage their money well, and to help those in problem debt. We reformed the regulation, giving the Financial Conduct Authority considerable regulatory powers, and we are setting up a new single financial guidance body to make it easier for people to get help with money matters.
Imran Hussain
After seven wasted years, wages are still lower than they were in 2010. Self-employed people are paid less on average than they were a generation ago and 6 million people are earning less than the living wage. Does the Minister share my alarm that too many people have to worry about buying school uniforms, affording a family holiday, or even just paying their rent or mortgage?
John Glen
The Government recognise that it is very important that we focus on the poorest people in our society. That is why we have increased the national living wage by 4.7%, which will mean a pay rise of £600 for those working full time. We have also increased the personal allowance, frozen fuel duty and increased childcare support to attend to the concerns that the hon. Gentleman has raised.
Nicky Morgan (Loughborough) (Con)
As part of the Treasury Committee’s inquiry into household finances, we are looking at the problems facing financially vulnerable households. Last week, my Committee colleague, the hon. Member for Bassetlaw (John Mann), and I visited the citizens advice bureau in Nottingham. Caseworkers there told us about the problems caused by banks and companies, but said that the harshest creditor of all is the Government. There is little forbearance for late council tax or welfare overpayments, and bailiffs are often the first port of call, rather than a last resort. Is the Minister concerned by this heavy-handedness? Does he agree that central and local government should lead by example in their treatment of the most financially vulnerable?
John Glen
I acknowledge the vital work that my right hon. Friend and her Committee are undertaking in this important area. We will be implementing a breathing space as part of the work of the single financial guidance body. The Bill establishing that body is in Committee, as my right hon. Friend will know. I am absolutely determined that we will get this right and listen to best practice across the country. We committed in our manifesto to a six-week breathing space, and we will look carefully at the representations received from across the country.
Paul Blomfield (Sheffield Central) (Lab)
Antoinette Sandbach (Eddisbury) (Con)
Chris Green (Bolton West) (Con)
The Economic Secretary to the Treasury (John Glen)
By helping all places to access the benefits of technological progress and reach their full potential, we can drive growth at national level. Since autumn 2016, the Government have announced an additional £7 billion for science and innovation—an increase of about 20% to total Government R&D spending by 2021.
Chris Green
Does the Minister agree that digital technology enables further devolution away from London of high-tech industries? What are the Government doing to support that?
John Glen
The Government are expanding Tech City’s reach across the UK, creating Tech Nation by investing £21 million over four years to help people grow digital businesses. That includes a large-scale CityVerve smart city demonstrator in Manchester, which demonstrates how the internet of things, technologies and services can improve local services in transport, energy, health and culture.
Chi Onwurah (Newcastle upon Tyne Central) (Lab)
Newcastle has national centres of excellence in data, health and energy—key drivers of our future economy. On Saturday, I held a business summit with Sadiq Khan, the Mayor of London, at which start-ups identified attracting investment as a key barrier to their growth. What are the Government doing to attract investment to businesses in Newcastle? Does that include a regional business bank, as supported by Labour?
John Glen
We certainly have a national bank to encourage investment in small businesses. We also have the £400 million digital infrastructure fund. As a Minister, I am doing all I can to ensure that we find the best conditions for investing in small and medium-sized enterprises across the country.
Mike Amesbury (Weaver Vale) (Lab)
The Economic Secretary to the Treasury (John Glen)
In summer 2015, the Government asked Jayne-Anne Gadhia, CEO of Virgin Money, to lead a review into gender diversity in the financial services sector. In response, the Treasury launched the women in finance charter, which asks firms to commit to four key actions as recommended in the review. So far, 162 firms have signed the charter, which covers more than 600,000 UK financial service employees.
Rachel Maclean
I thank the Minister for that excellent answer. Following the Royal Mint’s appointment of its first female chief executive in its 1,100-year history, will the Minister join me in congratulating her on her new role?
John Glen
Yes, I am delighted to congratulate Anne Jessopp, and I wish her all the best in her new role. If I may, Mr Speaker, I would also like to take this opportunity to applaud and congratulate my own constituent, Minette Batters, who was elected as the first woman president of the National Farmers Union. I wish the Secretary of State for Environment, Food and Rural Affairs all the best with that.
Banking Act 2009 Reporting
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The Economic Secretary to the Treasury (John Glen)
The Treasury has laid before the House of Commons a report required under section 231 of the Banking Act 2009 covering the period from 1 April 2017 to 30 September 2017. Copies of the document are available in the Vote Office.
[HCWS494]
Sanctions and Anti-Money Laundering Bill [ Lords ] (Second sitting)
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Helen Goodman (Bishop Auckland) (Lab)
I beg to move amendment 21, in clause 17, page 16, line 36, at end insert—
“(8) An appropriate Minister must publish guidance from the Crown Prosecution Service on when it is in the public interest for a breach of a sanctions regulations to be prosecuted.”
This amendment would require the Government to publish guidance on when it is in the public interest for a breach of sanctions regulations to be prosecuted.
It is a great pleasure to see you in the Chair this afternoon, Dame Cheryl. It is not quite as sunny as it was this morning, but it is still very cold.
The clause is about enforcement of sanctions regulations. Breaching sanctions is a criminal offence, and this morning we discussed whether the legislation on those criminal offences is appropriate. It is fair and reasonable that people have a clear view of what the penalties will be for any breach of sanctions. Our amendment would require the Crown Prosecution Service to say when it is in the public interest that a breach of sanctions regulations be prosecuted.
The Treasury published some guidance a few months ago entitled “Monetary Penalties for Breaches of Financial Sanctions”. I am sorry to say that it does not include the sort of detail that we would expect. The stark reality was brought to our attention last week, when the Economic Secretary to the Treasury had to correct an answer to a written parliamentary question. I had asked him what the total level of breaches was in 2017 and on 8 February, he told me it was £117 million. On 22 February, he told me that the estimate had shot up to £1.4 billion—a tenfold increase, which suggests that the Treasury is not keeping the beady eye that it ought to be keeping on this matter.
Many years ago, I was a Treasury civil servant. One year, I was responsible for the Budget arithmetic and I had to go and tell Chancellor Nigel Lawson that I had lost £50 million from the Budget arithmetic and it was very embarrassing. I never lost £1.2 billion, which is what current Treasury Ministers seem to have managed to do. The fact that the figures are so large tells us that the level of breaches is significant. It is hard for us to believe that, in a great wodge of £1.2 billion, there are not some breaches that should be prosecuted. From the information Ministers have given us, we have no idea whether this figure involves many small breaches or three or four really big breaches.
A report published in December in a magazine called Nikkei Asian Review says that 49 nations have breached North Korean sanctions. The sanctions against North Korea have been agreed at the UN Security Council—they could not be more important. We have a situation where North Korea is trying to develop nuclear weapons. Everybody in this House and this country knows that that would be disastrous—completely destabilising to the region and potentially the whole world. If North Korea acquires nuclear weapons, the risk of proliferation is immense. I know Foreign Office Ministers understand this. The report suggests that 13 of the countries that have breached North Korean sanctions have engaged in arms trading; they are primarily countries with a history of political turmoil such as Syria, Angola, Iran, Myanmar and Sir Lanka, but even Germany and France were deemed culpable in certain respects.
Obviously, breaching weapons of mass destruction sanctions against North Korea is something that nobody would take lightly. One would think that this would be a case where it would be appropriate to prosecute, but because of the lack of transparency, we have no idea whether we in this country have made mistakes in the same way as the Germans and French have. Obviously there would be nothing intentional about it, but accidents too can be dangerous. That is why we think the Government should be stronger and clearer on enforcement. The Government could make matters clearer by publishing CPS guidelines explaining how and when they believe prosecutions are in the public interest. If the Economic Secretary could tell us a little more about what happened with this mistake—how the figure came to be £1.2 billion out—and whether the Treasury has looked back over previous years to see the pattern of breaches, I am sure that would be of great interest to the Committee.
The Economic Secretary to the Treasury (John Glen)
It is a pleasure to serve under your chairmanship for the first time, Dame Cheryl.
First, I would like to address the serious matter that the hon. Member for Bishop Auckland raised with respect to Office of Financial Sanctions Implementation data. She is quite correct to assert that there was an error; this was caused by technical and data problems. Officials have now manually checked each case by reference to the original information and have confirmed that the revised figures for suspected breaches reported in 2017 accurately answer the question. I wrote to the hon. Lady at the earliest opportunity and apologised to her.
The Government take financial sanctions evasion extremely seriously and have made an unprecedented commitment to tackling it, increasing the dedicated resources and providing new enforcement powers to deal with breaches, including new penalty powers and an increase in the criminal offence’s maximum sentence from two to seven years. We cannot go into specifics on the size of the breaches but I can assure the hon. Lady and the whole Committee that I do not anticipate difficulties in future.
Amendment 21 would require the Government to provide specific guidance, produced by the Crown Prosecution Service, on the prosecution of sanctions breaches. Hon. Members will be interested to know that the CPS already publishes guidance on how the public interest is taken into account in any decision to prosecute in “The Code for Crown Prosecutors”. This public interest test is the same one that we applied in decisions to prosecute sanctions offences. The Government’s view is that no additional public interest guidance is necessary for a sanctions prosecution decision. The public interest is a fundamental assessment in any decision to prosecute, and “The Code for Crown Prosecutors” includes factors relevant to public interest tests such as the seriousness of the offence and the level of culpability of the suspect. These and other factors included in the code are relevant to the decision to prosecute in sanctions cases. There is therefore no need for separate guidance on this amendment.
We will be discussing clause 37 and the Government’s duty to issue guidance later in Committee. Clause 37 sets out a comprehensive duty to provide guidance where it is required, but the Government believe that in this instance separate guidance is not required.
Helen Goodman
That is rather unsatisfactory, because the general guidance is intended for the practitioners. As we were discussing this morning, it is for the NGOs and for the banks. I am sure that the Minister understands that the CPS guidance is for the lawyers, and although the banks and NGOs may be advised by lawyers it does take a different form. The Treasury guidance addresses processes; it does not look at the public interest in this context. I am not satisfied with what the Minister says and I do wish to test the view of the Committee on this amendment.
Question put, That the amendment be made
John Glen
Sanctions are one of our most important foreign policy and national security tools. To ensure the effective implementation and enforcement of sanctions, it is important that we have the greatest possible range of enforcement measures at our disposal to deal with breaches of sanctions. Following the vote in the other place to remove key offences and penalties creation provisions from the Bill, I regret to say that we currently have no meaningful enforcement measures in the sanctions Bill.
It is important to remember that when these clauses were debated in the other place, those peers who objected to them did so not on the grounds that sanctions should not be enforced with a criminal offence, but out of concern about the division of powers between the Government and Parliament. The Government have been working with interested Peers and parliamentary counsel as a matter of urgency to consider the procedural safeguards that could be added to clause 17 to address those concerns and enable the key provisions on offences and penalties to be reinstated.
Community Bank Closures
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The Economic Secretary to the Treasury (John Glen)
I commend the hon. Member for Stoke-on-Trent North (Ruth Smeeth) and my hon. Friend the Member for Hazel Grove (Mr Wragg) for securing this debate, and thank the Backbench Business Committee for allowing it. We have had a lively debate with 16 Back-Bench contributions, and it has rightly aroused a lot of passion. It is the third such debate in the four weeks that I have been in post—two of them in Westminster Hall—and the banks will need to respond to what they have heard. From Strangford to Selkirk, from Newton Aycliffe to Sandwich, from Bradford on Avon to Bungay, we have heard the case made for banks to remain open, and in my constituency I will be meeting representatives from Lloyds bank tomorrow to discuss the closure of Wilton bank, which is scheduled for 19 March this year.
This is a very important issue, and I listened carefully to the observations from Members across the House on what the Government should do. They ranged from my hon. Friend the Member for South Thanet (Craig Mackinlay), who, characteristically, was very reticent to see Government get involved, to the hon. Member for Sefton Central (Bill Esterson) who, in a measured speech, held out the prospect of significant intervention from Government. I believe there is a role for Government in dealing with this issue, and I will talk about the Government’s actions to support those who require over-the-counter banking services and the Government’s commitment to widespread free access to cash.
I want to address the banking standard, too; I noted the observations of the right hon. Member for Don Valley (Caroline Flint) about her perception of the inadequacy of the banking standard and I want to address that, as well as the concerns raised about the way that the banking services available at the post office work. I will also address the UK ATM operator LINK’s financial inclusion programme.
As Economic Secretary, I want financial services that deliver for all customers up and down this country, from Salisbury high street to the farthest reaches of the Hebrides. None the less, all hon. Members will appreciate that banking, like so many other industries, needs to respond to changing customer behaviour, which we have heard depicted by many Members in our debate. Change, which in this case is driven by the unrivalled speed of innovation in the financial services sector, is not easy to remedy. How many of us in this House regularly use our local branch, and how many of us, like me and others, manage our finances online or via our mobile phones? Ultimately, what I have repeatedly made clear in this place in the four weeks that I have been in post is that the management decisions of banks are made without intervention from Government.
I hear the call from the hon. Member for North Ayrshire and Arran (Patricia Gibson) to intervene but, given that the Scottish Government own Prestwick completely, it is somewhat odd to be told by the Scottish Government spokesperson that Ministers have no role in the operation of contractual agreements made by the airport. It is really important that we acknowledge that inconsistency and that the Government act through the regulator, and that is not a static dialogue. I have already spoken extensively to the head of the Financial Conduct Authority, and more can be done.
The Government firmly believe that these firms have a responsibility to minimise the impact of closures on communities wherever possible, which is why I am pleased to address the motion today. The Government already support a range of measures to protect access to banking services in local communities across the UK, but we must acknowledge the change that has happened. Branch footfall is falling year on year—it is down by a third since 2011, as my hon. Friend the Member for Chippenham (Michelle Donelan) noted—and the number of banking app transactions has risen massively, to 932 million in 2016, which is an increase of 57% on the previous year. The Government cannot resist that; the question is what we can do with the tools available.
The access to banking standard commits all major high street banks to a series of outcomes when they decide to close a branch. There are three principal obligations. First, banks will give customers at least three months’ notice of closure. I note the call from my hon. Friend the Member for Chippenham to extend that period. They have a responsibility as soon as operationally ready, and I note that RBS gave six months’ notice. Secondly, banks will work with customers after the announcement has been made to ensure that they know how and where they can continue to bank. Thirdly—this is vital—banks are required to identify vulnerable customers and ensure that they receive all the help they need. That could mean helping customers get online for the first time, or it could mean showing them the facilities at the local post office, or ensuring that they have access to a mobile branch, a telephone banking service or a local, free-to-use ATM. Obviously, every bank will take a different approach, but the principle of the standard is that the outcome for customers will be the same.
As of July 2017, the Lending Standards Board has had responsibility for monitoring and enforcing the standard. I say to the right hon. Member for Don Valley that the board does have the power to cancel or suspend a registered firm’s registration and give directions on future conduct, but I will look carefully at her remarks and consider whether anything could be done to strengthen the measures further. This independent oversight is a welcome and important addition to the way the standard works.
Turning to the ATM network and post offices, I acknowledge that the Government have made great strides in bolstering the over-the-counter banking services available at post offices, and an extra £370 million to support that work was announced in December. UK banks and building societies reached a new commercial agreement with the Post Office that has set the standard for the banking services available in post offices, ensuring a uniform level across the 11,600 branches. Those services can include the ability to check a balance, to withdraw and deposit cash using a debit card, to use chip and pin or pre-printed paying-in slips, and to deposit cheques. There is an ad hoc cash deposit limit of £2,000, but the Post Office estimates that that covers 95% of all transactions.
We should not forget that 99.7% of people in this country now live within three miles of their local post office, and 93% live within a mile. At the autumn Budget 2017 my predecessor wrote to the Post Office and UK Finance and asked them to consider how they could fulfil the aims they have set out.
Caroline Flint
Where did the Minister get the figure of 93%—perhaps he can furnish us with the information after the debate—because I do not think that bears any relationship to the reality for many of our constituents?
John Glen
I am happy to do that.
I have written to the Post Office and UK Finance to impress upon them the importance of developing detailed joint proposals to achieve the objectives that everyone rightly requires of them. I am clear that those proposals must include the following: a shared vision for public awareness of the banking services available at the Post Office; measurable outcomes that the parties agree they can use to determine their progress in delivering that vision; specific actions that the Post Office, UK Finance and parties to the banking framework agree to take to achieve the outcomes, collectively and/or individually, and a timeline for doing so; and arrangements for measuring the impact of the specific actions on public awareness throughout the UK to ensure the outcomes are achieved. I know that colleagues from across the House feel strongly about this issue—I have heard that today—and I am determined to see progress, so I have asked for a response by the end of March. I will be happy to update the House in due course.
Several hon. Members mentioned access to cash, and the Government continue to work with industry to ensure the provision of widespread free access to cash. LINK, which runs the ATM network in the UK, has assured the Government that industry is committed to maintaining an extensive network of free-to-use cash machines and to ensuring that the present geographical spread of ATMs is maintained. On 31 January, LINK announced plans to bolster its financial inclusion programme, which ensures the provision of ATMs in certain areas where demand would not otherwise make one viable, and LINK has confirmed that that will include addressing instances where the closure of a bank branch is leading to a financial inclusion problem. LINK has also specifically committed to protecting all free-to-use ATMs that are a kilometre or more from the next nearest free-to-use ATM.
In summary, I again thank the hon. Member for Stoke-on-Trent North and my hon. Friend the Member for Hazel Grove and all right hon. and hon. Members who have spoken this afternoon. I hope I have been able to give some reassurance that the Government recognise the frustration and disappointment caused by bank branch closures. Ultimately, the Government cannot reverse market movements or customer behaviour, and it is right that the Government do not intervene in commercial decisions that respond to such changes. However, I will continue to work to ensure that everyone, wherever they live, can access the banking services they need. This Government have taken measures to maintain access to vital banking services and to ensure that banks support communities across the UK when their local branches close. Banks will need to continue to respect and respond to Members’ engagement in that process, so I encourage every Member to keep the dialogue open with their constituents about how they can take advantage of the many options already in place.
Credit Cards: Cost Regulation
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The Economic Secretary to the Treasury (John Glen)
It is a pleasure to serve under your chairmanship, Mr McCabe. I thank the hon. Member for Walthamstow (Stella Creasy) for raising this significant issue with characteristic passion. I will seek to answer the specific questions she has raised about the role of the FCA and how fluid the situation is.
Consumer credit, including credit cards, plays an important role in our economy, helping consumers to smooth their income, spread costs over time and cope with unexpected financial shocks. However, risk is inherent in any credit product, so it is vital that consumers are treated fairly and protected from unscrupulous or predatory practice. The Government recognise that and are working with the regulator to ensure that such activity is curtailed.
I think it will be helpful if I set out first what the Government have already done on consumer credit. Our vision is of a well functioning and sustainable consumer credit market that responsibly meets the needs of all consumers. That is why we fundamentally reformed regulation of the consumer credit market, transferring regulatory responsibility from the Office of Fair Trading to the Financial Conduct Authority on 1 April 2014. The Government have given the FCA a robust set of powers, designed to protect consumers, in three key areas. The FCA assesses every firm’s fitness to lend and it has put in place a binding standard on firms. The FCA requires all firms to assess each customer’s ability to repay. The hon. Lady gave the example of Vanquis being able to lend £1,000 without any checks. I repeat: all lenders must make that assessment of their customers’ ability to repay. Firms must also treat customers who fall into arrears fairly. Thirdly, the FCA monitors the market. The characterisation of the FCA as passively waiting for a crisis does not do justice to the actions it has taken. I will go on to set those out and describe how they are still under review.
Focusing on the areas that are most likely to cause consumer harm, the FCA has a broad enforcement toolkit to punish breaches of its rules. The FCA’s enforcement arm supports its objectives by making it clear that there are real and meaningful consequences for firms and individuals who do not follow the rules. There is no limit to the fines it can levy. Crucially, it can force firms to provide redress to consumers. For example, in October 2017 the FCA announced that BrightHouse, a rent-to-own firm, will pay over £14.8 million in redress to customers in respect of agreements that may not have been affordable and payments that should have been refunded. That is just one example of the effectiveness of the FCA enforcement action. In total, the FCA issued fines of nearly £230 million last year, and as of December 2017 it had secured £734 million in redress for more than 1.47 million customers in the consumer credit market.
I turn now specifically to credit cards. When the Government gave the FCA responsibility for consumer credit regulation in 2014, it sought to build a sound understanding of the credit card market and to assess whether it was working well in the interests of consumers. To that end, as the hon. Lady mentioned, the FCA conducted an extensive study of the credit card market between 2014 and 2016. It found that competition within the industry was working well for the majority of consumers, but identified concerns about the scale and extent of problematic credit card debt. Last year the FCA consulted on remedies to tackle persistent credit card debt and proposed a robust package of remedies to tackle the issues—
Steve McCabe (in the Chair)
Order. There is a Division in the main Chamber, so we will have to suspend the sitting and you will all have to come back to conclude. We will suspend for 15 minutes.
Stella Creasy
The Minister mentions that the FCA consulted on persistent debt. The FCA defines persistent debt as paying 100% in interest and charges on top of the principal repaid over an 18-month period. Given the evidence that that is exactly what people are doing on these credit cards, and the fact that we intervened and capped the cost of credit through payday loans when we saw that, will the Minister explain why it is acceptable not to do that for credit cards when it is okay to do it for payday loans?
John Glen
I will come on to that. As ever, the hon. Lady is eager to intervene. Let me finish what I want to say, and I will give her the answer that she wishes to hear.
The remedies include requiring firms to take steps to encourage customers to repay debt quicker and to avoid getting into persistent debt in the first place. Where customers are not able to repay their debt in a reasonable period, firms will be required to offer forbearance. Firms will also be required to use the data available to them to identify customers at risk of financial difficulty earlier and to take appropriate steps.
The FCA’s rules apply to all credit card companies, including those that lend at the higher interest rates, some of which the hon. Lady mentioned, to customers with poor credit ratings. All lenders have a duty to treat customers fairly and to lend only to those who can afford to repay. We expect the FCA to publish a final policy statement soon, and I will look carefully at what it says to see how we can take this forward. It seems a bit unreasonable not to wait for the final policy statement before we conclude where the FCA has got to with it.
As an additional weapon in its armoury, the FCA has worked with the industry’s leading body, UK Finance, to secure a voluntary agreement with its members to restrict unsolicited credit limit increases, giving customers more control over their accounts. All customers will be made aware that they can choose not to receive offers, and customers in persistent debt will not receive any unsolicited credit limit increases at all. New customers will be given the choice of how credit limits will be applied to their account, and firms will make it easier for existing customers to decline offers of a credit limit increase by reminding them of their options.
The combination of existing FCA powers and the proposed package of remedies is a very robust arsenal.
John Glen
No, I will continue.
The measures are a demonstrable commitment by this Government, the regulators and the industry to tackle structural issues within the credit card market. [Interruption.] If the hon. Lady did me the courtesy of listening, as I did to her, it would be quite helpful.
Thinking about the limits that should be put on the cost of credit card borrowing, which I think the hon. Lady referred to, it is important to note that the Government have already given the FCA the power to cap all forms of credit, and the FCA can do that if it thinks it is necessary to protect consumers. However, it is neither this Government’s mandate nor our role to intervene in a functioning and competitive market. In addition, a credit card cap would be inherently more complex than the price cap introduced on payday loans in 2015. Payday loans are fixed-term, discrete loans, whereas credit cards provide a revolving credit facility—they are quite different.
What the Government can do, and already have done, is ensure that there are regulatory checks and balances in place to ensure fairness. The FCA has said that it will keep the issue of a mandatory cap on the cost of credit, including credit cards, under review. The FCA will monitor the effectiveness of its credit card remedies, and can take further action if necessary.
Stella Creasy
The Minister has not answered my question. With the greatest respect to the Minister, I asked him a very specific question about the disparity between it being unacceptable for people with payday loans to pay double in interest what they had taken out, and those 5 million people who are stuck in 10 years-worth or more of credit card debt continuing to pay those rates. I would like his specific answer on that unacceptability.
John Glen
I did directly explain that there is a distinct difference between the nature of a payday loan and a credit card facility. I explained that very clearly and I am sorry the hon. Lady did not hear it.
It will be helpful to set out some of the things that the Government have done with respect to dealing with people in financial difficulty. The Government are delivering on their manifesto commitment to implement a breathing space and debt management plan. The call for evidence on the breathing space scheme recently closed, and the Government have committed to consult on a policy design proposal in the summer.
We set up the Money Advice Service, which spent close to £49 million on providing 440,000 debt advice sessions last year. We are now going further to ensure that consumers can gain easier access to financial guidance and debt advice by creating a new single financial guidance body, which will bring together the Pensions Advisory Service, Pension Wise and the Money Advice Service. The new body will make it easier for consumers to get help with all aspects of their financial lives, as well as having a statutory duty to improve financial capability and to commission free-to-use debt advice. The Bill to create the new body is currently before the House of Commons.
I thank the hon. Lady for raising this issue—I acknowledge that it is very important—and for speaking with such fervour. I share some of the concerns that she has expressed. Millions of people in this country use credit cards regularly, and the Government are committed to ensuring that they are treated fairly and not encouraged to fall into persistent debt. I hope the hon. Lady understands that a cap on the cost of credit card borrowing is not an effective solution. It is a blunt, interventionist approach to a complex issue. The Government have given the FCA strong powers to take action, and the FCA is putting in place measures to tackle persistent debt in the credit card market. This is not a static issue, however, or one that I and the Government are not interested in examining on an ongoing basis. The Government and the FCA are committed to ensuring that it remains under constant review.
Question put and agreed to.
Resolved,
That this House has considered regulation of the cost of credit cards.
Financial Guidance and Claims Bill [ Lords ] (Third sitting)
John Glen Excerpts(8 years, 1 month ago)
Public Bill CommitteesRead Full debate Read Hansard Text Read Debate Ministerial Extracts
The Economic Secretary to the Treasury (John Glen)
I beg to move Government amendment 3, in clause 24, page 17, line 21, at end insert—
“( ) In section 1H (interpretation provisions for FCA’s objectives)—
(a) in subsection (2), at the end of paragraph (c) insert ‘or to engage in claims management activity’;
(b) in subsection (8), at the appropriate place insert—
‘“engage in claims management activity” has the meaning given in section 21;’.”
The result of this amendment of the Financial Services and Markets Act 2000 would be that references in the FCA’s statutory objectives to “regulated financial services” include services provided by authorised persons in communicating, or approving the communication by others of, invitations to engage in claims management activity.
The Chair
With this it will be convenient to discuss the following:
Government amendment 4.
Clause stand part.
That schedule 4 be the Fourth schedule to the Bill.
New clause 7—Regulatory principles to be applied in respect of claims management services—
“(1) In relation to the regulation of claims management services, the FCA must act according to the principles that—
(a) authorised persons should act honestly, fairly and professionally in accordance with the best interests of consumers who are their clients; and
(b) authorised persons should manage conflicts of interest fairly, both between themselves and their clients, and between clients.
(2) In this section, ‘authorised person’ has the same meaning as in the Financial Services and Markets Act 2000, and ‘authorised persons’ shall be construed accordingly.”
This new clause would introduce a duty of care which would require claims management services to act with the best interests of the customers in mind.
John Glen
It is a pleasure to serve under your chairmanship once again, Mr Rosindell.
Government amendments 3 and 4 are small consequential amendments to bring relevant provisions into line with the changes made by clause 24 to section 21 of the Financial Services and Markets Act 2000. Clause 24 amends FSMA to enable the Financial Conduct Authority to regulate specified activities in relation to claims management services in Great Britain. That includes extending section 21 of FSMA so that the financial promotions regime, which deals with advertising and marketing by regulated firms, applies to claims management activity. Government amendments 3 and 4 will ensure that the financial promotions regime can function effectively. I am sure that Members will agree that it is necessary to make those amendments to ensure that claims management activity is captured.
New clause 7, which was tabled by the hon. Members for Birmingham, Erdington, for Weaver Vale and for Lewisham, Deptford, seeks to ensure that the FCA adheres to a set of regulatory principles in relation to acting in the best interests of consumers and managing conflicts of interest fairly. Aside from the provisions in general consumer law, the FCA already applies rules to firms that conduct regulated activities in relation to their dealings with consumers.
First, regulated firms must adhere to the “principles for businesses”, which are fundamental obligations set out in the FCA handbook. Principle 2 requires firms to conduct their business
“with due skill, care and diligence.”
Principle 6 requires a firm to
“pay due regard to the interests of its customers and treat them fairly.”
Principle 8 sets out that a firm
“must manage conflicts of interest fairly, both between itself and its customers and between a customer and another client.”
Secondly, the FCA’s “client’s best interest” rule states that a firm
“must act honestly, fairly and professionally in accordance with the best interests of its client”.
That rule applies to a number of regulated activities. Thirdly, many FCA rules also contain an obligation on firms to take reasonable care for certain regulated activities. Finally, the rules in the FCA handbook are supplemented by more sector-specific rules in various FCA sourcebooks.
Under its existing objectives, when the FCA takes responsibility for the regulation of claims management companies, it will be able to apply its existing principles for businesses and to make any other sector-specific rules that may be necessary. To secure appropriate consumer protection, the FCA supervises against those rules and other provisions, and can take enforcement action against firms where necessary.
Gareth Thomas (Harrow West) (Lab/Co-op)
Does the Minister accept that there is a risk that the FCA has been captured by some of the bigger financial interests, and that additional legal protection is therefore required to rebalance how it operates to properly protect the consumer interest?
John Glen
I acknowledge that such concern has been widely expressed throughout the passage of the Bill. However, the FCA has issued total fines of more than £229 million. In its view, its regulatory toolkit is currently sufficient to enable it to fulfil its consumer protection objective. The FCA will consider the precise rules that apply to claims management companies and how they form an effective regulatory regime overall. In doing so, the FCA will need to take into account its statutory objective of securing an appropriate degree of protection for consumers. It will also consult openly and publicly on the proposed rules.
The final regime is not set without consultation or reference to the legitimate concerns raised during the passage of the Bill. I note the hon. Gentleman’s observations, but they can be accommodated by the way in which the FCA will handle the matter. Given that, the Government do not believe the new clause is necessary. According to the explanatory statement, the new clause would introduce a duty of care on claims management companies. I will provide some more detail on that duty of care because I have thought a lot about it and have new points that I want to raise following Second Reading. The Government recognise that there are different views on the merits of introducing a duty of care for financial services providers and what it would mean in practice.
Macmillan Cancer Support has run an excellent campaign drawing attention to that important issue. Last week I met Lynda Thomas and her team from Macmillan in the Treasury to discuss their work and their concerns around the proposed duty of care. They told me of their work with Nationwide and Lloyds. They have been working in partnership with the sector on the role of firms in supporting customers.
Neil Coyle (Bermondsey and Old Southwark) (Lab)
I am sure the Minister is aware that the Department for Work and Pensions is again in court facing a legal challenge for changes to welfare and support for disabled people, including people with terminal illnesses such as cancer. Does the Minister not accept that Macmillan’s recommendations might go some way to rebuilding disabled people’s trust and faith in the Government, including those with terminal illnesses?
John Glen
I acknowledge the case, but it is not for me as a Treasury Minister to comment on it. We need to be clear about the impact of the duty of care and examine it carefully. It is right that we challenge practices that are not up to standard. The question is how we most effectively achieve that without wider collateral damage.
On Macmillan’s partnership work in the financial services sector in supporting customers affected by cancer, I pay tribute to the work done and I am grateful for the insights that it brings, but there is huge uncertainty around the potential impact a duty of care could have on both firms and consumers. As with all significant policy changes, it is important to understand all potential pros and cons. I hope Members agree that there would need to be a thorough assessment of the potential impact of a duty of care before any decision is made on a change of policy. For example, a duty of care might enable consumers to bring financial services firms to court. There might be significant cost, complexity and time involved with that, leave alone codifying exactly what the duty of care would mean.
In turn, a duty of care might lead to a negative impact on product provision and approach to innovation, as firms might not want to risk legal challenge based on an untested new concept. Increasing operational costs for firms as a result of a duty of care will inevitably lead to higher prices for consumers, including those in the most vulnerable category. Given those considerations, I hope Members agree that it would not be appropriate for the Government to amend the Bill before a full assessment of the potential impact has been conducted.
The Government believe that the FCA, as the UK’s independent conduct regulator for financial services, is best placed to evaluate the merits of a duty of a care. Recognising the pitch and depth of the legitimate concerns raised, last week I met Andrew Bailey and discussed the duty of care with him, and the FCA will discuss it further. Concern has been expressed that, in the determination to issue a discussion paper post-Brexit, there was too much of a delay. I pressed Andrew Bailey on the need to bring that forward. He understands and acknowledges the desire of Parliament for progress on evaluation, so the FCA now proposes to issue a discussion paper later this year. It will invite contributions from all interested parties on the case for and against a duty of care, what form such a provision might take and consequential issues arising from adopting it. That will be an open process, designed to gather views. I am grateful to the FCA for its commitment to accelerate its proposed timetable.
Gareth Thomas
I commend the Minister for pressing Andrew Bailey, because the FCA under his leadership has a reputation of having become a bit pedestrian. However, I do not see why there is a clash between adding the new clause, as my hon. Friend the Member for Birmingham, Erdington proposes, and cracking on with the consultation exercise that the Minister just described. Surely they gel nicely.
John Glen
My view, and the Government’s view, is that the pace of that consultation process needs to be stepped up and the FCA needs to respond, with all consequences in mind for vulnerable people with respect to the costs of services and the protections legitimately achieved through the FCA’s activity.
I stress that the FCA has a close focus on vulnerability in its broader work. I note the concerns of the hon. Member for Harrow West, but it works in the interests of all consumers of financial services. In October, the FCA published its “Financial Lives” survey, the first annual large-scale survey of 13,000 interviews, designed to add a substantial new source of data to the regulator’s understanding of consumers in retail financial markets. Subsequently, it published the “Approach to Consumers” paper, which details how it will measure the effects of its actions on consumers, particularly with respect to access and vulnerability. I and the Under-Secretary of State for Work and Pensions, my hon. Friend the Member for Hexham, take this matter seriously. We will challenge the FCA on the further steps that need to be undertaken.
Gareth Thomas
May I push the Minister a little harder? I could understand it if he was arguing that there should be a change to the proposal made by my hon. Friend the Member for Birmingham, Erdington, saying that regulations should be brought forward to give Government the chance to bring in a duty of care once the consultation had taken place. Instead, he seems to be saying, “Let’s not bother putting anything in the Bill that gives us the power to bring that in later. Let’s just wait and see—mañana!—when the FCA can be bothered to get round to the consultation exercise. Then we might look at bringing forward primary legislation.” My worry is that an opportunity for primary legislation will not come around again. I therefore press him to see whether he could be a little more sympathetic to the case my hon. Friend will advance.
John Glen
I am grateful to the hon. Gentleman for his remarks. I would not characterise the Government’s position as, “Let it happen mañana and take our hands off the tiller.” I met Andrew Bailey, and this was not his starting point. It is for Ministers to talk to the FCA, take the views of Parliament as clearly expressed by Members on both sides of the House, and use that pressure to force the FCA to address the issue in a comprehensive way that deals with the real experience of our constituents.
The Government have set out that process, and I have set out the rules and facilities that exist for the FCA. I am convinced there is a process in place that will enhance the necessary protection.
Neil Coyle
There are some interesting parallels. Where the Government have a clear objective and aim, as they did in welfare reform, consultations are rushed through by Departments. That delivers inadequate legislation, which is why the Government ended up in court, as has been mentioned. In this case, the Government are passing the buck to the FCA, even though Macmillan has identified a problem, whereas on terror insurance legislation, where the ball is back in the Government’s court and could have been covered by the Bill, they have left a gaping hole, which leaves businesses such as those affected in my constituency in June last year facing potential damages because of the inadequacy of legislation. Why have the Government not opened consultation on that?
John Glen
I cannot talk about areas outside my responsibility, but I can address the new clause. I assure the hon. Member for Bermondsey and Old Southwark that I am engaging closely with the FCA and have already achieved an acceleration of its timetable for engagement. It is important that his constituents’ concerns, which he raised previously, are addressed, and I expect the FCA to take steps in that direction urgently.
I was delighted to hear from Macmillan that it has a tremendous working relationship with the FCA. The two organisations are engaged in dialogue, and last year they worked closely on the call for input on the challenges firms face in providing travel insurance for consumers who have had cancer. The FCA will be publishing a feedback statement and its next steps in due course. Dialogue is taking place, and there is responsiveness. For those reasons, it is not appropriate to include these regulatory principles in the Bill, so I request that the hon. Member for Birmingham, Erdington withdraw the amendment.
Jack Dromey (Birmingham, Erdington) (Lab)
On a point of order, Mr Rosindell. I seek your guidance. I will be speaking to Opposition new clause 7, but I note that Government amendments 3 and 4 are unobjectionable, so I may go straight on to making my remarks about new clause 7.
Jack Dromey
With the greatest respect, the Government are prescriptive the whole time, and I think this is an area ripe for prescription. I stress again that we need to send an unmistakable message that regulated providers have certain obligations that fall upon them. There are already obligations imposed under law, for example on financial probity. We should add to those a duty of care to customers, particularly when they are suffering from or dying from cancer. I should have thought that was entirely unobjectionable. Macmillan is absolutely right and the Minister has been right to respond to its representations. I will come in a moment to what I hope will happen at the next stages.
To return to my point, staff did not have knowledge about the products and the help available to people affected by cancer. If we are to tackle such problems, the provision of appropriate support, flexibility in policies and procedures, and ensuring that staff are appropriately trained to support vulnerable customers need to be at the heart of banking culture.
One of the things that struck me most in the findings was that only one in 10 people with cancer had told their bank about their diagnosis in the first place. Many people with cancer still do not think their bank will be able to help them, while others worry that telling the bank will have negative consequences, so they are reluctant to disclose their diagnosis. Regardless of whether that negative perception is justified on all occasions, it represents a serious barrier to people seeking help early and tells us that the existing rules are not adequate. Despite some provisions in the area, the banking sector is still a long way off the point where meeting the needs of vulnerable customers is at the heart of corporate culture, hence the clear evidence from Macmillan.
The financial services consumer panel has noted that the regulatory principle of treating customers fairly does not adequately ensure that firms exercise appropriate levels of care towards their customers. It is interesting that the FCA’s own panel concluded that. If banks and building societies had a legal duty of care towards their customers, it would give people with cancer confidence to disclose their diagnosis, knowing that they could trust their bank to act in their best interests.
Consumers are also demanding action in this area. More than 20,000 people have signed an open letter from Macmillan Nurse Miranda, calling for a duty of care to be introduced. I urge the Government to look at the recommendation made by the House of Lords Financial Exclusion Committee on a duty of care, which has been strongly evidenced by Macmillan Cancer Support. The Committee concluded that, as first recommended by the financial services consumer panel, the Government should amend the Financial Services and Markets Act 2000
“to introduce a requirement for the FCA to make rules setting out a reasonable duty of care for financial services providers to exercise towards their customers.”
I appreciate that any change as significant as this must be subject to proper consideration and consultation, as the Minister said. It is therefore welcome that the FCA has recognised that and is committed to publishing a discussion paper on the issue. It is welcome that the Minister has pressed the FCA to bring that forward, and I will come on to timescale in a moment. However, the Government and the FCA have said that this must wait until after the withdrawal from the EU becomes clear. I think that now, as the Minister said earlier, that may no longer be the case, not least because who knows when we will withdraw from the European Union—
Jack Dromey
There is a certain lack of clarity on the part of the Government about that end. Given that the introduction of a duty of care would still require legislation, when can we expect it to be introduced if we do not use the opportunity presented by the Bill? Will the Minister clearly set out his view as to the likely timescale for the introduction of a duty of care, from the initial consultation process through to the point at which consumers begin to benefit from any change? Given the evidence that has been presented about the need for further support for vulnerable customers, is a prolonged delay acceptable? I urge the Minister to take note of the breadth of support for this issue and the strong evidence presented on the need for action. I suggest that the Government reflect on that further and bring forward suitable proposals on Report.
My final point is that I sense a joint determination to act, and that is welcome. We should act, but what does that mean in terms of both substance and timescale? We will not press the new clause to a vote but I invite the Minister to undertake that he will come back on Report to set out with some clarity the likely timescale and substance of what the Government might eventually do.
John Glen
I am grateful to the hon. Gentleman for his comments. There is broad agreement on how serious the issue is, but I would characterise the Government’s approach as wanting not to send a message but to secure an outcome. They want to secure an outcome when they understand exactly what the impact of the changes might be.
As I said in some of my earlier remarks, there is huge uncertainty about how a potential duty of care would impact on firms and consumers. That is why I am very pleased with the accelerated timetable. I acknowledge that there is no absolute clarity about what will flow from that, but that is because we do not know what the outcome of the discussion will be. However, I take on board the hon. Gentleman’s concerns and I acknowledge his sensitivity to what Macmillan has said—it is unacceptable that 11% of people who have cancer tell their financial service provider—but it is also true, as my hon. Friend the Member for Bexhill and Battle said, that not all banks are doing a poor job. I heard from Macmillan about the wonderful work that Nationwide has done, and I think it is for other banks to reflect on what they need to do to change their behaviours.
Gareth Thomas
Nationwide is not a bank; it is a building society, with a very different tradition to the corporate interests of the big banks. I make that as an aside. Although I am not normally a fan of secondary legislation as opposed to primary legislation, I wanted to press the Minister: will he consider the broader point made by my hon. Friend the Member for Birmingham, Erdington—that there might be a case, surely, for the Minister to consider bringing forward on Report the scope for secondary legislation to bring in such a duty of care once the FCA, when it can be bothered, finally produces its consultation document?
John Glen
I am grateful for the hon. Gentleman’s comments, but I do not share his characterisation of the FCA’s willingness to engage on this. As I set out, the FCA is engaged in dialogue with Macmillan and has now accelerated the timetable for dealing with the subject. I will reflect on the comments made and see what can be said to give more assurance further on, but I am convinced that the dialogue with the FCA will lead to a proportionate outcome that takes full account of the impact. I therefore reiterate my hope that the new clause will be withdrawn.
Jack Dromey
On the basis of what the Minister has said—that he will come back on Report—we will not be pressing new clause 7.
Amendment 3 agreed to.
Amendment made: 4, in clause 24, page 18, line 7, at end insert—
“( ) In section 137R (financial promotion rules)—
(a) in subsection (1), omit the “or” at the end of paragraph (a) and after that paragraph insert—
‘(aa) to engage in claims management activity, or’;
(b) in subsection (6), for ‘has’ substitute ‘and “engage in claims management activity” have’.”—(John Glen.)
The result of this amendment of the Financial Services and Markets Act 2000 would be that the FCA may make rules about the communication, or the approval of another person’s communications, by authorised persons of invitations or inducements to engage in claims management activity.
Clause 24, as amended, ordered to stand part of the Bill.
Schedule 4 agreed to.
Schedule 5
Regulation of claims management services: transitional provision
John Glen
I beg to move amendment 20, page 41, line 13, leave out from “to” to end of line 15 and insert “a person falling within paragraph 1A,”
This amendment and amendment 22 would enable the FCA to obtain information and documents from claims management companies operating or previously operating in Scotland if the FCA considers that it needs the information or documentation in preparation for its role as the regulator of claims management companies.
The Chair
With this it will be convenient to discuss the following:
Government amendments 21 and 22.
That schedule 5 be the Fifth schedule to the Bill.
John Glen
Amendments 20 to 22 are technical amendments that extend the FCA’s data-gathering powers to Scotland. They amend schedule 5, which contains transitional provisions to extend the FCA’s information-gathering powers; to enable it to take preparatory steps, such as to consult on rules; and to enable it to adopt rules made by the current regulator. That ensures that the FCA can obtain information and documents from claims management companies operating or previously operating in Scotland, if the FCA considers that it needs the information or documentation in preparation for its role as the regulator of claims management companies.
The amendments will help ensure that Scottish consumers are adequately protected when the regulation for financial services claims management companies is transferred to the FCA. I am sure that hon. Members would agree that it is right to ensure that the regulator is suitably prepared to regulate Scottish claims management companies, and will agree with the amendments.
Jack Dromey
It is a sensible move to give the FCA those extended powers. Therefore, we note the proposed amendments. Our colleague from the Scottish National party, the hon. Member for Paisley and Renfrewshire South, might wish to comment, but this seems to us a logical and sensible proposal.
Mhairi Black (Paisley and Renfrewshire South) (SNP)
I agree.
Amendment 20 agreed to.
Amendments made: 21, in schedule 5, page 41, line 23, leave out from “a” to end of line 24 and insert “person falling within paragraph 1B.”
This amendment and amendment 22 would enable the FCA to obtain reports from claims management companies operating in Scotland if the FCA considers that it needs the report in preparation for its role as the regulator of claims management companies.
Amendment 22, in schedule 5, page 41, line 24, at end insert—
“1A A person falls within this paragraph if the person—
(a) is or at any time was authorised under section 5(1)(a) of the Compensation Act 2006 (provision of regulated claims management services), or
(b) is, or at any time was, providing services in Scotland which the person would be, or would have been, prohibited from providing in England and Wales by section 4(1) of the Compensation Act 2006 unless authorised under section 5(1)(a) of that Act.
1B A person falls within this paragraph if the person—
(a) is authorised under section 5(1)(a) of the Compensation Act 2006 (provision of regulated claims management services), or
(b) is providing services in Scotland which the person would be prohibited from providing in England and Wales by section 4(1) of the Compensation Act 2006 unless authorised under section 5(1)(a) of that Act.”—(John Glen.)
See the explanation for amendments 20 and 21.
Schedule 5, as amended, agreed to.
Clause 25
Power of FCA to make rules restricting charges for claims management services
Question proposed, That the clause stand part of the Bill.
John Glen
Clause 25 inserts a new section into the Financial Services and Markets Act 2000 to give the FCA the power to cap the amount that firms can charge customers for the claims management services it regulates. The clause also places a duty on the FCA to make rules restricting charges for claims for financial services or products. The Government believe that placing a duty on the FCA to cap the amount that firms can charge consumers for services related to financial services claims is the only satisfactory way of ensuring that consumers receive good value for money. This is especially true given that consumers can, for example, take complaints about the mis-selling of payment protection insurance to the financial ombudsman for free. In addition, the general fee-capping power provided by the clause gives the FCA the necessary flexibility to respond to future changes in the claims management sector.
Jack Dromey
I would like to make two points. First, the proposed changes are unobjectionable and we note them. Secondly, I will, however, be speaking to amendments 47 and 48 in respect of allowing consumers to keep 100% of their PPI compensation, but we will come to those in due course.
Question put and agreed to.
Clause 25 accordingly ordered to stand part of the Bill.
Clause 26
PPI claims and charges for claims management services: general
John Glen
I beg to move amendment 5, in clause 26, page 21, line 17, leave out “and 28” and insert
“to (PPI claims: interim restriction on charges imposed by legal practitioners after transfer of regulation to FCA)”.
This amendment would apply the explanation of terms given in clause 26 to the new clause inserted by NC3.
The Chair
With this it will be convenient to discuss the following:
Government amendment 6.
Clause stand part.
Government new clause 3—PPI claims: interim restriction on charges imposed by legal practitioners after transfer of regulation to FCA.
John Glen
These amendments ensure that legal services regulators can continue to impose fee restrictions for PPI claims from the point at which the transfer of regulation of CMCs to the FCA takes place. This will be effective in the case of the Law Society of England and Wales until it implements its own rules on fee capping and, in the case of the General Council of the Bar and the Chartered Institute of Legal Executives, until 29 April 2020.
The interim fee cap will be set at 20% of the claim value, excluding VAT. It will apply to CMCs and legal services providers, and will be enforced by the relevant regulators from two months after the Bill receives Royal Assent. The interim fee cap will ensure fair and proportionate prices for consumers using claims management services for mis-sold PPI claims.
Government amendments 5 and 6 and new clause 3 ensure that the interim fee cap provisions introduced as a concessionary amendment in the House of Lords work together with the other Government amendments we are discussing today, and provide the legal services regulators with the power to restrict fees in relation to claim management services. The amendments will ensure that consumers are equally protected from excessive fees when using a legal services provider to make a claim for mis-sold PPI, and that there is continuity of coverage for the fee cap throughout the transfer of regulation. This is similar to the existing provisions in the Bill in relation to the FCA. I hope that all Members will agree that these are sensible and desirable amendments for the purposes of consumer protection.
Jack Dromey
Briefly, I have two related points. First, we agree that the legal services regulators should be given those powers. Secondly, and crucially, the objective is to protect consumers. I once again refer to amendments 47 and 48, which I will speak to shortly.
Amendment 5 agreed to.
Amendment made: 6, in clause 26, page 22, line 11, at end insert—
“, and
(c) so far as relevant for the purposes of section (PPI claims: interim restriction on charges imposed by legal practitioners after transfer of regulation to FCA), to be read as referring to any service which is a relevant claims management activity (within the meaning given by subsection (5) of that section).”—(John Glen.)
This amendment would define what references to “regulated services” in clause 26 mean when relevant for the purposes of the new clause inserted by NC3.
Clause 26, as amended, ordered to stand part of the Bill.
Clause 27
PPI claims: interim restriction on charges before transfer of regulation to FCA
Jack Dromey
The amendment would allow consumers to keep 100% of the PPI compensation. The Government introduced an interim cap on the fees that claims management companies could charge consumers in relation to payment protection insurance claims. That was a welcome move in the right direction, but it does not go far enough to protect consumers from paying disproportionately high fees for what is often very little work. The Ministry of Justice estimates that the average amount of commission charged to consumers by CMCs is 28% plus VAT. The FCA estimates that the average payout for PPI mis-selling is around £1,700 which means that a CMC would, on average, charge a successful claimant £476 plus VAT.
Although the proposed fee cap will reduce the amount that consumers have to pay to CMCs, it would still mean an average charge of £340, with VAT on top. If the Government want to take meaningful action to protect consumers from high fees, they should propose a solution that allows consumers to keep 100% of their PPI compensation. They should require firms to pay CMC costs for PPI claims—capped at 20% and VAT—when they are at fault and the consumer has used a CMC rather than claiming directly.
This measure would apply only for the interim period until new FCA regulations come into force, or until August 2019, which is the deadline for making PPI claims, whichever is sooner. This would incentivise firms still paying compensation—and it is shameful that they still are; getting justice for the people concerned is like pulling teeth—to proactively reach out and encourage consumers to make claims directly to them, and I am bound to say that it is something that should and must happen. It would also fully protect consumers from paying high charges to CMCs.
In summary, the Government’s proposal is a welcome step in the right direction, but I would welcome an explanation from the Minister as to why he cannot take this further step that would see those that were wronged receive 100% of the compensation so that this wrong is put right.
John Glen
I am grateful to the hon. Gentleman for setting out amendments 47 and 48, which seek to make firms at fault pay the fees for claims management services used to pursue successful PPI claims. I understand that this approach is intended to incentivise firms to be more proactive in offering compensation when dealing with consumer complaints. However, it could encourage more speculative and unmeritorious claims, adding waste to the redress system, to the detriment of consumers and the industry. The amendment also has the potential to allow CMCs to charge consumers directly when they are unsuccessful in pursuing a PPI claim. This would serve only to add to the incentives for taking forward speculative claims, and I am not sure that that is the Opposition’s intention.
I also do not believe that the measure is necessary. The FCA is already taking direct action to ensure that firms do not make it difficult for consumers to claim compensation, and there have been significant improvements in the handling of PPI complaints by firms. By September 2017, firms were upholding around 80% of claims. Since January 2011, firms have handled over 20.8 million PPI complainants and paid over £29 billion in redress to consumers found to have been mis-sold a PPI policy, and rightly so.
In addition, as of March 2017 firms had sent over 5.5 million letters to customers they identified as being at high risk of having suffered a past mis-sale and who had not complained, inviting them to do so. The FCA also launched a two-year consumer awareness campaign in August 2017, paid for by the relevant firms, to raise awareness of the deadline and encourage consumers to decide whether to complain, as well as highlighting free routes for pursuing a claim.
Finally, it is important to note that consumers do not need to use the CMCs to make a claim. They can go directly to the relevant firm and subsequently to the Financial Ombudsman Service for free. Making a complaint is a simple process that many people will be able to do for themselves. A number of sources of information are available to help individuals to understand how to make a complaint, including websites and phone lines for the FCA and Financial Ombudsman Service. In the light of these arguments, I encourage the Opposition spokesman to withdraw the amendment.
John Glen
Clause 27 deals with the application and enforcement of the interim fee cap before the transfer of claims management regulation to the FCA. It states that the cap will be implemented by the claims management regulation unit and legal services regulators in England and Wales. It also defines the first interim period as the period beginning with the day the cap comes into force, two months after Royal Assent, until the day before regulation transfers to the FCA. It is clear that the clause plays an integral part in establishing the interim fee cap.
Question put and agreed to.
Clause 27 accordingly ordered to stand part of the Bill.
Clause 28 ordered to stand part of the Bill.
Clause 29
Extent
The Parliamentary Under-Secretary of State for Work and Pensions (Guy Opperman)
I beg to move amendment 7, in clause 29, page 25, line 32, leave out from beginning to “extends” and insert “Part 1, other than the provisions mentioned in subsections (2) to (3B),”
This amendment makes a minor drafting change, restructuring the extent clause, in consequence of the changes to that clause made by Amendment 8 and the amendments relating to Part 2.
Guy Opperman
The amendment is a minor change that removes the privilege amendment inserted in the House of Lords. Privilege amendments are inserted to acknowledge that it is the privilege of the House of Commons to control charges on the people or on public funds. Its removal is a formality.
Amendment 17 agreed to.
Clause 31, as amended, ordered to stand part of the Bill.
New Clause 1
Personal pension schemes: requirements to recommend guidance etc
“(1) Section 137FB of the Financial Services and Markets Act 2000 (FCA general rules: disclosure of information about the availability of pensions guidance) is amended as follows.
(2) After subsection (1), insert—
“(1A) The FCA must also make general rules requiring the trustees or managers of a relevant pension scheme to take the steps mentioned in subsections (1B) and (1C) in relation to an application from a member or survivor—
(a) to transfer any rights accrued under the scheme, or
(b) to start receiving benefits provided by the scheme.
(1B) As part of the application process, the trustees or managers must ask the member or survivor whether they have received appropriate pensions guidance or appropriate independent financial advice.
(1C) In a case where the member or survivor indicates that they have not received appropriate pensions guidance or appropriate independent financial advice, the trustees or managers must also—
(a) recommend that the member or survivor seeks such guidance or advice, and
(b) ask the member or survivor whether—
(i) they wish to wait until they have received such guidance or advice before deciding whether to proceed with the application, or
(ii) they wish to proceed with the application without having received it.
(1D) The rules may—
(a) specify what constitutes appropriate pensions guidance and appropriate independent financial advice;
(b) make further provision about how the trustees or managers must comply with the duties in subsections (1B) and (1C) (such as provision about methods of communication and time limits);
(c) specify what the duties of the trustees or managers are in the situation where a member or survivor does not respond to a question mentioned in subsection (1B) or (1C)(b);
(d) provide for exceptions to the duties in subsections (1B) and (1C) in specified cases.”
(3) In subsection (2), for “this section” substitute “subsection (1)”.
(4) After subsection (2) insert—
“(2A) Before the FCA publishes a draft of any rules to be made by virtue of subsection (1A), it must consult—
(a) the Secretary of State, and
(b) the single financial guidance body.”
(5) In subsection (3), for “the rules” substitute “rules to be made by virtue of subsection (1)”.
(6) After subsection (3) insert—
“(3A) In determining what provision to include in rules to be made by virtue of subsection (1A), the FCA must have regard to any regulations that are for the time being in force under section 113B of the Pension Schemes Act 1993 (occupational pension schemes: requirements to recommend guidance etc).”
(7) In subsection (4), for the definition of “pensions guidance” substitute—
““pensions guidance” means information or guidance provided by any person in pursuance of the requirements mentioned in section5 of the Financial Guidance and Claims Act 2018 (information etc about flexible benefits under pension schemes);”.” —(Guy Opperman.)
This new clause requires the FCA to make rules requiring trustees or managers of personal and stakeholder pension schemes to check whether members have either received guidance or advice or have opted out of receiving it before accessing or transferring their pension assets. It also makes consequential amendments to FSMA 2000. It would be inserted after clause 18.
Brought up, read the First and Second time, and added to the Bill.
New Clause 2
Occupational pension schemes: requirements to recommend guidance etc
“(1) The Pension Schemes Act 1993 is amended as set out in subsections (2) to (5).
(2) After section 113A insert—
“113B Occupational pension schemes: requirements to recommend guidance etc
(1) The Secretary of State must make regulations requiring the trustees or managers of an occupational pension scheme to take the steps mentioned in subsections (2) and (3) in relation to an application from a relevant beneficiary—
(a) to transfer any rights accrued under the scheme, or
(b) to start receiving benefits provided by the scheme.
(2) As part of the application process, the trustees or managers must ask the beneficiary whether they have received appropriate pensions guidance or appropriate independent financial advice.
(3) In a case where the beneficiary indicates that they have not received appropriate pensions guidance or appropriate independent financial advice, the trustees or managers must also—
(a) recommend that the beneficiary seeks such guidance or advice, and
(b) ask the beneficiary whether—
(i) they wish to wait until they have received such guidance or advice before deciding whether to proceed with the application, or
(ii) they wish to proceed with the application without having received it.
(4) The regulations may—
(a) specify what constitutes appropriate pensions guidance and appropriate independent financial advice;
(b) make further provision about how the trustees or managers must comply with the duties in subsections (2) and (3) (such as provision about methods of communication and time limits);
(c) specify what the duties of the trustees or managers are in the situation where a beneficiary does not respond to a question mentioned in subsection (2) or (3)(b);
(d) provide for exceptions to the duties in subsections (2) and (3) in specified cases;
(e) provide for the Secretary of State or another prescribed person to issue guidance for the purposes of this section, to which trustees or managers must have regard in complying with their duties under the regulations.
(5) In determining what provision to include in the regulations, the Secretary of State must have regard to any rules that are for the time being in force under section 137FB(1A) of the Financial Services and Markets Act 2000.
(6) In this section—
“relevant beneficiary”, in relation to a pension scheme, means—
(a) a member of the scheme, or
(b) another person of a prescribed description,
who has a right or entitlement to flexible benefits under the scheme;
“flexible benefits” has the meaning given by section 74 of the Pension Schemes Act 2015;
“pensions guidance” means information or guidance provided by any person in pursuance of the requirements mentioned in section5 of the Financial Guidance and Claims Act 2018 (information etc about flexible benefits under pension schemes).”
(3) In section 115 (powers as respects failure to comply with information requirements), in subsection (1), after “113” insert “, 113B”.
(4) In section 182(5) (power of Treasury to direct that regulation-making powers are exercisable only in conjunction with them), after “except” insert “regulations under section 113B or”.
(5) In section 185(2) (consultations about other regulations: exceptions), after paragraph (c) insert—
“(ca) regulations under section 113B; or”.
(6) The Pension Schemes (Northern Ireland) Act 1993 is amended as set out in subsections (7) to (9).
(7) After section 109A insert—
“109B Occupational pension schemes: requirements to recommend guidance etc
(1) The Department must make regulations requiring the trustees or managers of an occupational pension scheme to take the steps mentioned in subsections (2) and (3) in relation to an application from a relevant beneficiary—
(a) to transfer any rights accrued under the scheme, or
(b) to start receiving benefits provided by the scheme.
(2) As part of the application process, the trustees or managers must ask the beneficiary whether they have received appropriate pensions guidance or appropriate independent financial advice.
(3) In a case where the beneficiary indicates that they have not received appropriate pensions guidance or appropriate independent financial advice, the trustees or managers must also—
(a) recommend that the beneficiary seeks such guidance or advice, and
(b) ask the beneficiary whether—
(i) they wish to wait until they have received such guidance or advice before deciding whether to proceed with the application, or
(ii) they wish to proceed with the application without having received it.
(4) The regulations may—
(a) specify what constitutes appropriate pensions guidance and appropriate independent financial advice;
(b) make further provision about how the trustees or managers must comply with the duties in subsections (2) and (3) (such as provision about methods of communication and time limits);
(c) specify what the duties of the trustees or managers are in the situation where a beneficiary does not respond to a question mentioned in subsection (2) or (3)(b);
(d) provide for exceptions to the duties in subsections (2) and (3) in specified cases;
(e) provide for the Department or another prescribed person to issue guidance for the purposes of this section, to which trustees or managers must have regard in complying with their duties under the regulations.
(5) In determining what provision to include in the regulations, the Department must have regard to any rules that are for the time being in force under section 137FB(1A) of the Financial Services and Markets Act 2000.
(6) In this section—
“relevant beneficiary”, in relation to a pension scheme, means—
(a) a member of the scheme, or
(b) another person of a prescribed description,
who has a right or entitlement to flexible benefits under the scheme;
“flexible benefits” has the meaning given by section 74 of the Pension Schemes Act 2015;
“pensions guidance” means information or guidance provided by any person in pursuance of the requirements mentioned in section5 of the Financial Guidance and Claims Act 2018 (information etc about flexible benefits under pension schemes).”
(8) In section 111 (powers as respects failure to comply with information requirements), in subsection (1), after “109” insert “or 109B”.
(9) In section 177(6) (power of Department of Finance to direct that regulation-making powers are exercisable only in conjunction with them), after “except” insert “regulations under section 109B or”.” —(Guy Opperman.)
This new clause makes equivalent provision to that in NC1 for occupational pension schemes and requires the Secretary of State and the Department for Communities to make regulations corresponding to the FCA rules mentioned in NC1. It also makes consequential amendments to the Pension Schemes Act 1993 and the Pension Schemes (Northern Ireland) Act 1993.
Brought up, read the First and Second time, and added to the Bill.
New Clause 3
PPI claims: interim restriction on charges imposed by legal practitioners after transfer of regulation to FCA
“(1) A legal practitioner—
(a) must not charge a claimant, for a service which is a relevant claims management activity provided in connection with the claimant’s PPI claim, an amount which exceeds the fee cap for the claim, and
(b) must not enter into an agreement that provides for the payment by a claimant, for a service which is a relevant claims management activity provided in connection with the claimant’s PPI claim, of charges which would breach, or are capable of breaching, the prohibition in paragraph (a).
(2) Subsections (2) to (5) and (7) of section 27 apply for the purposes of the prohibitions in subsection (1) as they apply for the purposes of the prohibitions in section 27(1) but as if—
(a) references in those subsections to “regulated claims management services” were references to “relevant claims management activity” and references to “regulated persons” were references to “legal practitioners”, and
(b) the first entry in columns 1 and 2 of the table in subsection (5) were omitted.
(3) Subsection (1) applies as follows—
(a) the prohibition in subsection (1)(a) applies only to charges imposed by a legal practitioner under an agreement entered into during the period—
(i) beginning with the first day of the second interim period (within the meaning given by section28(6)), and
(ii) ending with the end date for that practitioner, and
(b) the prohibition in subsection (1)(b) applies only to agreements entered into by a legal practitioner during that period.
(4) For the purposes of subsection (3), the end date is—
(a) for a legal practitioner for whom the relevant regulator is the Law Society of England and Wales, the day before the coming into force of the first rule made by the Law Society of England and Wales under section (Legal services regulators’ rules: charges for claims management services) that applies to, or to any description of, PPI claims, and
(b) for any other legal practitioner, 29 April 2020.
(5) In this section “relevant claims management activity”—
(a) does not include any reserved legal activities of the kind mentioned in section 12(1)(a) or (b) of the Legal Services Act 2007 (exercise of a right of audience or the conduct of litigation), but
(b) otherwise, means activity of a kind specified in an order under section 22(1B) of the Financial Services and Markets Act 2000 (regulated activities: claims management services), disregarding any exemption in that order for activities carried on by, through, or at the direction of, a legal practitioner.” —(Guy Opperman.)
This new clause requires the Law Society of England and Wales, the Bar Council and the Chartered Institute of Legal Executives, after the transfer of regulation from the Claims Management Regulator to the FCA, to enforce a fee cap in respect of charges by lawyers for certain claims management services provided in connection with a PPI claim until, in the case of the Law Society, the Society has made its own rules about charges for PPI claims, and in any other case, 29 April 2020.
Brought up, read the First and Second time, and added to the Bill.
New Clause 4
Legal services regulators’ rules: charges for claims management services
“(1) The Law Society of England and Wales, the General Council of the Bar and the Chartered Institute of Legal Executives may make rules prohibiting regulated persons from—
(a) entering into a specified relevant claims management agreement that provides for the payment by a person of specified charges, and
(b) imposing specified charges on a person in connection with the provision of a service which is, or which is provided in connection with, a specified relevant claims management activity.
(2) The Law Society of England and Wales must exercise that power to make rules in relation to all relevant claims management agreements, and all relevant claims management activities, which concern claims in relation to financial products or services.
(3) The Law Society of Scotland may make rules prohibiting regulated persons from—
(a) entering into a relevant claims management agreement concerning a claim in relation to a financial product or service that provides for the payment by a person of specified charges, and
(b) imposing specified charges on a person in connection with the provision of a service which is, or which is provided in connection with, a relevant claims management activity concerning a claim in relation to a financial product or service.
(4) Rules under this section may make provision securing that for the purposes of the prohibition referred to in subsection (1)(a) or (3)(a) charges payable under a relevant claims management agreement are to be treated as including charges payable under an agreement treated by the rules as being connected with the relevant claims management agreement.
(5) In this section ‘regulated persons’ means—
(a) in relation to the Law Society of England and Wales—
(i) persons who, or licensable bodies which, are authorised by the Law Society to carry on a reserved legal activity,
(ii) European lawyers registered with the Law Society under the European Communities (Lawyer’s Practice) Regulations 2000 (S.I. 2000/1119), and
(iii) foreign lawyers registered with the Law Society under section 89 of the Courts and Legal Services Act 1990;
(b) in relation to the Law Society of Scotland, Scottish legal practitioners;
(c) in relation to the General Council of the Bar—
(i) persons who, or licensable bodies which, are authorised by the General Council to carry on a reserved legal activity, and
(ii) European lawyers registered with the General Council under the European Communities (Lawyer’s Practice) Regulations 2000;
(d) in relation to the Chartered Institute of Legal Executives, persons authorised by the Institute to carry on a reserved legal activity.
(6) The rules must be made with a view to securing an appropriate degree of protection against excessive charges for the provision of a service which is, or which is provided in connection with, a relevant claims management activity.
(7) The rules may specify charges by reference to charges of a specified class or description, or by reference to charges which exceed, or are capable of exceeding, a specified amount.
(8) The rules may not specify—
(a) charges for a reserved legal activity within the meaning of the Legal Services Act 2007 (see section 12 of that Act);
(b) charges imposed in respect of—
(i) the exercise of a right of audience by a Scottish legal practitioner;
(ii) the conduct of litigation by a Scottish legal practitioner.
(9) In subsection (8)(b)—
‘conduct of litigation’ means—
(a) the bringing of proceedings before any court in Scotland;
(b) the commencement, prosecution and defence of such proceedings;
(c) the performance of any ancillary functions in relation to such proceedings;
‘right of audience’ means the right to appear before and address a court in Scotland, including the right to call and examine witnesses.
(10) In relation to an agreement entered into, or charge imposed, in contravention of the rules, the rules may (amongst other things)—
(a) provide for the agreement, or obligation to pay the charge, to be unenforceable or unenforceable to a specified extent;
(b) provide for the recovery of amounts paid under the agreement or obligation;
(c) provide for the payment of compensation for any losses incurred as a result of paying amounts under the agreement or obligation.
(11) For the purposes of this section—
‘relevant claims management activity’ means activity of a kind specified in an order under section 22(1B) of the Financial Services and Markets Act 2000 (regulated activities: claims management services), disregarding any exemption in that order for activities carried on by, through, or at the direction of, a legal practitioner;
‘relevant claims management agreement’ means an agreement, the entering into or performance of which by either party is a relevant claims management activity;
‘Scottish legal practitioner’ means—
(a) a person qualified to practise as a solicitor in accordance with section 4 of the Solicitors (Scotland) Act 1980;
(b) European lawyers registered with the Law Society of Scotland under the European Communities (Lawyer’s Practice) (Scotland) Regulations 2000 (S.S.I. 2000/121);
(c) foreign lawyers registered with the Law Society of Scotland under section 60A of the Solicitors (Scotland) Act 1980;
(d) an incorporated practice within the meaning given by section 34(1A)(c) of the Solicitors (Scotland) Act 1980;
(e) a licensed legal services provider within the meaning of Part 2 of the Legal Services (Scotland) Act 2010 (see section 47 of that Act) that provides, or offers to provide, legal services under a licence issued by the Law Society of Scotland;
‘specified’ means specified in the rules, but ‘specified amount’ means an amount specified in or determined in accordance with the rules.
(12) This section does not limit any power of the Law Society of England and Wales, the Law Society of Scotland, the General Council of the Bar or the Chartered Institute of Legal Executives existing apart from this section to make rules.”—(John Glen.)
This new clause makes provision about rules prohibiting charges for claims management services which may be made by the Law Society of England and Wales, the General Council of the Bar, the Chartered Institute of Legal Executives and (where the claim concerns financial products or services) the Law Society of Scotland, and imposes a duty on the Law Society of England and Wales to make such rules in relation to claims concerning financial products or services.
Brought up, and read the First time.
The Chair
With this it will be convenient to discuss Government new clause 5—Extension of power of the Law Society of Scotland to make rules.
John Glen
New clauses 4 and 5 place a duty on the Law Society of England and Wales to cap fees in relation to financial service claims management activity, and give the Law Society of Scotland a power to restrict fees charges for that activity. The clauses also give some legal services regulators in England and Wales a power to restrict fees charged for broader claims management services, and give the Treasury a power to extend the Law Society of Scotland’s fee-capping power to broader activity in the future. As I am sure hon. Members are aware, claims management services are carried out not only by claims management companies, but sometimes by legal service providers as well. That is why the Government are introducing the new clauses. They will ensure that consumers are protected no matter which type of claims management service provider they use—whether regulated by the legal service regulators or by the Financial Conduct Authority.
As Members will know, fees charged for claims management services have attracted severe criticism. The Public Accounts Committee 2016 report on financial services mis-selling commented:
“It is a failure of the system of regulation and redress that claims management companies have been able to make up to £5 billion out of compensation to victims of mis-selling.”
The Bill already contains provisions to ensure that the FCA will cap fees in relation to financial product and services claims, and new clause 4 replicates that duty in relation to the Law Society of England and Wales. It also mirrors the FCA’s broader power to restrict fees for claims management activities by providing a similar power to the General Council of the Bar, the Chartered Institute of Legal Executives, and the Law Society of England and Wales. That power will enable them to make rules that cap the fees that legal service providers charge for claims management services. That will enable the legal services regulators to adapt to any future changes in the market, alongside the FCA.
New clause 4 also gives the Law Society of Scotland a power to restrict fees in relation to financial services claims management, and new clause 5 gives the Treasury a power to extend that provision to include wider claims management activity, should that be required in the future. That gives the flexibility required to respond to any future changes in the claims management sector. Although the Government are of the view that the regulation of claims management activity is reserved, we have worked in a spirit of co-operation with the Scottish Government to ensure that the provisions are fit for purpose in Scotland, and that Scottish consumers have the same high standards of protection when using claims management services as consumers in England and Wales. I hope Members agree that the new clauses collectively provide for the best protection of consumers across Great Britain.
Jack Dromey
The Minister was right to refer to the Public Accounts Committee report. It is nothing short of scandalous that there has been an immense industry, often on the back of misery. Consumers deserve to be properly protected in future. The clauses are sensible because they go beyond claims management companies, with the duty on the Law Society. Of course, it is about not only CMCs, but legal service providers.
Finally, with regard to new clause 5, it makes sense for there to be flexibility to extend the provision to restrict fees in the future, given potential changes in the nature of the industry.
Question put and agreed to.
New clause 4 accordingly read a Second time, and added to the Bill.
New Clause 5
Extension of power of the Law Society of Scotland to make rules
“(1) The Treasury may by regulations amend section (Legal services regulators’ rules: charges for claims management services) for the purpose of extending the power in subsection (3) of that section so as to apply to—
(a) all relevant claims management agreements;
(b) all relevant claims management activity;
(c) any description of relevant claims management agreement;
(d) any description of relevant claims management activity.
(2) The Treasury must obtain the consent of the Scottish Ministers before making regulations under subsection (1).
(3) Regulations under this section—
(a) are to be made by statutory instrument;
(b) may make incidental, supplemental or consequential provision.
(4) A statutory instrument containing regulations under this section may not be made unless a draft of the instrument has been laid before and approved by a resolution of each House of Parliament.”—(John Glen.)
This new clause would permit the Treasury, with the consent of the Scottish Ministers, to make regulations which extend the power given to the Law Society of Scotland to make rules by NC4.
Brought up, read the First and Second time, and added to the Bill.
New Clause 6
Cold calling about claims management services
“(1) The Privacy and Electronic Communications (EC Directive) Regulations 2003 (S.I. 2003/2426) are amended as follows.
(2) In regulation 21 (calls for direct marketing purposes), after paragraph (5) insert—
‘(6) Paragraph (1) does not apply to a case falling within regulation 21A.’
(3) After regulation 21 insert—
‘21A Calls for direct marketing of claims management services
(1) A person must not use, or instigate the use of, a public electronic communications service to make unsolicited calls for the purposes of direct marketing in relation to claims management services except in the circumstances referred to in paragraph (2).
(2) Those circumstances are where the called line is that of a subscriber who has previously notified the caller that for the time being the subscriber consents to such calls being made by, or at the instigation of, the caller on that line.
(3) A subscriber must not permit the subscriber’s line to be used in contravention of paragraph (1).
(4) In this regulation, “claims management services” means the following services in relation to the making of a claim—
(a) advice;
(b) financial services or assistance;
(c) acting on behalf of, or representing, a person;
(d) the referral or introduction of one person to another;
(e) the making of inquiries.
(5) In paragraph (4), “claim” means a claim for compensation, restitution, repayment or any other remedy or relief in respect of loss or damage or in respect of an obligation, whether the claim is made or could be made—
(a) by way of legal proceedings,
(b) in accordance with a scheme of regulation (whether voluntary or compulsory), or
(c) in pursuance of a voluntary undertaking.’
(4) In regulation 24 (information to be provided for the purposes of regulations 19 to 21)—
(a) in the heading, for ‘, 20 and 21’ substitute ‘to 21A’;
(b) in paragraph (1)(b), after ‘21’ insert ‘or 21A’.”—(John Glen.)
This amendment inserts a provision into the Privacy and Electronic Communications (EC Directive) Regulations which prohibits live unsolicited telephone calls for the purposes of direct marketing in relation to claims management services except where the person called has given prior consent to receiving such calls.
Brought up, and read the First time.
The Chair
With this it will be convenient to discuss new clause 9—Ban on unsolicited real-time direct approaches by, on behalf of, or for the benefit of companies carrying out claims management services and a ban on the use by claims management companies of data obtained by such methods—
“(1) The FCA must, within the period of six months beginning with the day on which this Act comes into force, introduce bans on—
(a) unsolicited real-time direct approaches to members of the public carried out by whatever means, digital or otherwise, by, on behalf of, or for the benefit of companies carrying out claims management services or their agents or representatives,
(b) the use for any purpose of any data by companies carrying out claims management services, their agents or representatives where they cannot demonstrate to the satisfaction of the FCA that this data does not arise from any unsolicited real-time direct approach to members of the public carried out by whatever means, digital or otherwise.
(2) The FCA must fix the appropriate penalties for breaches of subsection (1)(a) and (b) above.”
This new clause would require the FCA to ban cold calling for claims management companies. Critically, it would also ban the use by these companies of any data obtained by cold calling. Together, these provisions would make cold calling for CMCs illegal and cut off the revenue stream to cold callers, by preventing CMCs using their data. The new clause would also allow the FCA to set the appropriate penalties for any breach of either of these bans. The bans would come into effect with the passing of this Bill.
John Glen
Government new clause 6 is about cold calling made for the purposes of providing claims management services. As Members will be aware, that topic has been discussed at length during the passage of the Bill. The Government have listened to the debates closely and committed in the other place to table an amendment that would restrict cold calls made by claims management companies. The new clause makes good on that commitment.
Calls from claims management companies and other entities are not merely a source of irritation, but can result in extreme distress to those answering the calls, especially the most vulnerable in our society. As the Government have stated in previous debates, we have forced companies to display their calling line identification when they call. We have made it easier to prosecute those involved in making the calls by removing the threshold for financial penalties to be administered and we have strengthened the Information Commissioner’s powers for imposing fines on wrongdoers.
In addition, the claims management regulator and the Solicitors Regulation Authority have taken action against claims companies and solicitors that have breached tough direct marketing rules, including in relation to accepting illegally generated leads. However, we appreciate that we need to do more to truly eradicate the problem. New clause 6 seeks to ban cold calls made for the purposes of direct marketing in relation to claims management services, except where the person called has given prior consent to receiving such calls. The new clause will insert a provision into the Privacy and Electronic Communications (EC Directive) Regulations 2003, which govern unsolicited direct marketing.
The new clause will ensure that any call, whether it is from a claims management company, an individual or a lead generator, made for the purposes of direct marketing in relation to claims management services, is an unlawful call unless the receiver has explicitly consented to that call being made to them. The new clause takes the onus away from the individual to opt out of such calls being made to them—by signing up to the telephone preference service, for example—and puts the responsibility back on the organisation and its due diligence before making such calls.
There are complexities in legislating, including those related to navigating EU frameworks. However, the Government are convinced that the new clause will have the effect of making unwanted calls from claims management services unlawful.
Gareth Thomas
Is there not a concern that, having given consent to be phoned once, an individual might then be subject to a series of unwanted phone calls? One could imagine a situation in which an initial call is wanted by one of our constituents, but a company takes advantage of the permission to make a series of unwarranted further calls by arguing that it has the legal power to do so. What would happen in that situation?
Gareth Thomas
I apologise for intervening again, but I am thinking of an elderly constituent. One hears of scams and constituents being taken advantage of. How do we protect the individual who genuinely wants information and perhaps gives permission once, but then, perhaps because of their age or infirmity or whatever, they start to get taken advantage of? How do we prevent that?
John Glen
I am sorry that I cannot give the hon. Gentleman a full service response, but I will look into that issue carefully and keep in mind the specific circumstances he has described, which I will seek to address in my reply.
The new clause is another robust proposal to add to our package of measures to tackle unsolicited marketing calls. I hope they will be gratefully received by consumers across the UK.
Ellie Reeves (Lewisham West and Penge) (Lab)
It is a pleasure to serve under your chairmanship, Mr Rosindell, on my first Bill Committee.
New clause 9 would introduce a much-needed ban on cold calling by claims management companies, including in relation to personal injury. Although the Government have previously stated that they are committed to introducing a ban, new clause 6 simply does not go far enough.
It is estimated that claims management companies make around 51 million personal injury-related calls and texts each year and that most people have received one. Not only are such calls a nuisance, they also exploit vulnerable people. Not surprisingly, 67% of people are in favour of a ban on personal injury cold calling. It is worth noting that solicitors are already banned from cold calling in personal injury claims, but the fact that claims management companies are not risks bringing the sector into disrepute.
Cold calling can generate the false perception that obtaining compensation is easy, even where there is no injury. It can put pressure on people to pursue unmeritorious or, at the very worst, fraudulent claims, which they otherwise may not do. It may never have been the intention of someone to make a claim, but if they receive a text promising them thousands of pounds, it might seem very tempting. As my hon. Friend the Member for Birmingham, Erdington has already spoken about, there is evidence to suggest that cold calling has led to a rise in holiday sickness claims.
There is a context. The Government are proposing to reform compensation rules for whiplash claims and to increase the small claims limit in road traffic accidents from £1,000 to £5,000, and in public liability and employers’ liability claims from £1,000 to £2,000. The Government say that that is to cut down on fraudulent claims and bring down insurance premiums. However, many, including myself, are concerned that it will have a significant impact on access to justice, with people not being able to access proper legal advice in such claims, which can often be complex. Surely a better solution would be to have an outright ban on cold calling in personal injury claims by claims management companies, which is what new clause 9 seeks to do. The new clause is clear—it would result in a ban on all cold calling by claims management companies and would also ban other methods of approach, such as texting.
In contrast, new clause 6 creates confusion. It would ban cold calling unless someone has given consent. What amounts to consent in this context may not always be clear and people, especially the most vulnerable, may struggle to understand that they have consented to being cold called or may not appreciate what they have consented to. My hon. Friend the Member for Harrow West has raised concerns about the elderly and infirm. The Minister has not today been able to give any comprehensive answer on how those fears will be dealt with. Put simply, new clause 6 does not go far enough to ban the scourge of cold calling.
Earlier this month, Lord Keen stated in evidence to the Justice Committee that
“effectively stopping cold calling is an immensely complex process, because cold calling nowadays is carried out by unregulated entities from outwith the United Kingdom. We have instances of it being carried on in south America to target the UK. They then spoof their telephone numbers...so that it is impossible to trace the origins of the call.”
Will the Minister therefore assure me that more will be done to tackle such complex instances of cold calling, notwithstanding the measures in the Bill, so that the problem does not simply carry on under a different guise and vulnerable people do not continue to be exploited in this way?
John Glen
Opposition new clause 9 is identical to the Lords amendment and seeks to compel the FCA to ban unsolicited direct approaches by, on behalf of or for the benefit of companies providing claims management services. It also seeks to ban those companies from using data obtained through those methods. Unfortunately, it would give the FCA a duty it cannot enforce under its current regime.
I assure the hon. Member for Birmingham, Erdington and the hon. Member for Lewisham West and Penge that the Government are committed to tackling the issue properly and have consulted with the FCA, the claims management regulation unit and the Information Commissioner’s Office to ensure that Government new clause 6 does so in the most effective way—it will amend the Privacy and Electronic Communications (EC Directive) Regulations 2003 to prohibit direct marketing calls by claims management services unless an individual has given their consent. I was challenged on that matter, and I will clarify by letter.
The provision will be implemented by the ICO as the regulator responsible for the enforcement of the regulations. It has considerable powers and can issue fines of up £500,000. Under the incoming general data protection regulation, the unlawful use of personal data can attract fines of up to £17 million or 4% of annual turnover. The ICO is committed to enforcing the sanctions in the Privacy and Electronic Communications (EC Directive) Regulations 2003 and has issued nearly £3 million in monetary penalties for breaches of direct marketing since January last year. We have worked with the ICO in developing the new clause, and it is confident that it will be able to enforce it in conjunction with the FCA.
The FCA will of course have a role to play and will use all the tools available to take action where it discovers behaviour causing consumer harm. I acknowledge the cases that both Members raised, which are unacceptable. I am also confident that the FCA will work closely with the ICO where breaches are identified. I am sure members of the Committee will agree that it is better to include a new clause that will work—Government new clause 6—than to include new clause 9. As such, I encourage both Members not to press their new clause to a vote.
Jack Dromey
We are not convinced. It comes down fundamentally to the issue of principle. If it is right that all the evidence is that cold calling has been deeply damaging for the elderly, for the vulnerable, for those at a time of crisis in their lives, such as the Port Talbot workers and now, dare I say it, Carillion workers, and for business, then in those circumstances the practice has to end, full stop. The difference between the two new clauses is that we are saying precisely that with new clause 9. While the Government take some steps in that direction with new clause 6, the reality is that this unacceptable practice will continue and is likely to continue to grow.
The Minister talked about penalties handed out thus far of £3 million, but it is a billion-pound industry of abuse. We therefore believe it to be right to send that unmistakeable message so that never again will those people, particularly those at a time of crisis in their lives, fear that supposedly friendly phone call that time and again leads them to make disastrous decisions with disastrous consequences. Our intention is to press new clause 9 to a vote.
Question put and agreed to.
New clause 6 accordingly read a Second time.
Question put, That the clause be added to the Bill.