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Crown Currency Exchange

Volume 520: debated on Tuesday 7 December 2010

Motion made, and Question proposed, That this House do now adjourn.—(James Duddridge.)

I call Tessa Munt. [Interruption.] I note the considerable excitement in the House, and I am concerned that the hon. Lady should be able to develop her case on the regulation of foreign exchange services and the case of Crown Currency Exchange. I therefore appeal to right hon. and hon. Members leaving the Chamber to do so quickly and quietly, and to afford the hon. Lady the same courtesy as they would wish to be extended if they themselves had the Adjournment, so I hope there will be no further animated conversations, even between very senior Members.

Thank you, Mr. Speaker. I particularly thank the Minister for attending this evening to reply to this debate on the failure of Crown Currency Exchange. This is a matter that particularly concerns my constituents, Nick and Larissa Fry from Axbridge, and I also speak on behalf of a retired bank manager from Holcombe in the neighbouring constituency of the Deputy Leader of the House, my hon. Friend the Member for Somerton and Frome (Mr Heath).

The problem as far as I understand it is that companies such as Crown Currency Exchange are registered with the Financial Services Authority, but the legislation governing its activities looks at the size of the company, not at what it is doing. Crown Currency Exchange appears to have been behaving a bit like a high street bank or foreign currency exchange, and was registered as a small payments institution. As I understand it, it was meant to operate under an average of €3 million a month, but it appears from the administrator’s report that for the last 10 months the trading average was at about €10 million a month.

The legislation appears to exclude 547 small payments institutions in particular, from all of the many thousands of companies that are registered with the FSA. I want particularly to draw the House’s attention to the FSA website, which states that the FSA’s general duties

“in so far as reasonably possible”

are that it should provide

“market confidence, public awareness, protection of consumers and a reduction of financial crime.”

It appears that in this particular case it has failed on all four counts. The FSA also says that it is

“the regulator of all providers of financial services in the UK”,

and for that reason alone it is within certainly a retired bank manager’s understanding, my original understanding and the understanding of most people that these companies are in some way controlled by the FSA.

Crown Currency Exchange displayed on its website, besides the FSA logo, that of Her Majesty’s Revenue and Customs, which was clearly for money-laundering purposes. People are therefore entitled to feel that there should have been some sort of cover for the activities that that company undertook.

A number of my constituents who have been involved with CCE have also contacted me. Is it not equally despicable that the company sought to suggest that the lucrative exchange rates for the US dollar that it was actively advertising were the result of orders that had been cancelled, which allowed it to offer these fabulous terms, when in actual fact it had no currency, and it simply wanted to bring cash flow in to continue trading? Is that not a major concern that should have been picked up by the FSA?

That is quite correct. It certainly seems that on several occasions a number of people brought these problems to the attention of the FSA. One of whom was Robin Haynes, the managing director of Currency Index Ltd. He raised concerns about Crown Currency Exchange with the FSA in March 2009 and September 2010. He raised his concerns with HMRC in September 2010 and with Barclays, Crown Currency Exchange’s bankers, in May 2009. None of those appears to have been acted on.

There is also the case of a whistleblower who reported his concerns to the companies investigations branch of the Insolvency Service on 20 August 2009, but again nothing appeared to happen. It seems that none of those bodies is able to investigate a company until it has done something completely awful to its customers.

I congratulate the hon. Lady on securing the debate, because it has been stipulated that Barclays bank raised concerns about the company prior to its collapse but kept quiet. Does she, like me, believe that that should be further investigated?

I hope so, because so many people were taken in by the idea that they had some security, and Barclays probably should have done something. I understand that there was a meeting between one or two company directors and their bankers, Barclays, on 21 July, and that there were concerns at the time about the company’s solvency, yet for some months afterwards people still tried to put their money into the company, without any results.

Does my hon. Friend agree with a constituent of mine, who wrote to me to say:

“I think everyone would agree that if one is registered with the FSA it implies that that actually means something—it didn’t”?

Absolutely. Alarmingly, the FSA website states:

“We keep an up-to-date record of all FSA-regulated firms, bodies and individuals doing business in the UK. Our register is available to the public, so you can search for more information on all of our authorised firms.”

The problem is that the FSA seems to use “registered”, “regulated” and “authorised” almost conversationally, but in legal terms those definitions should not be bandied around on its website in such a way.

Throughout the whole United Kingdom, not just on the UK mainland, but in Northern Ireland, those who can least afford it have invested money in that system. I understand that a police investigation started today. Does the hon. Lady agree that, on the back of that investigation, a Government investigation should follow?

I hope so. There have been some arrests today, and I think that Devon and Cornwall police’s serious crime squad is taking part. I hope that that prefaces some action by the FSA.

Arrests have been made, including of one of my constituents. Indeed, the company’s offices were based in Hayle in my former constituency. The case has given rise to enormous concern, and although it is not on the same scale as sub-prime casino banking it has left many people in serious circumstances. I hope that my hon. Friend will advance her case, because this situation clearly needs to be regulated in future.

One might just need to get rid of “registered”, because it seems to have absolutely no meaning and to afford no protection—nothing.

I, too, congratulate the hon. Lady on securing the debate. The presence of so many Members shows the scale of the problem. My constituents believed that “registered” actually meant something in law. Does she agree that that has to be addressed urgently to ensure that no one else loses out?

I could not agree more. One problem I have discovered is that, although in the registration process the FSA takes receipt of £500, it is an overseer and not in any way, shape or form a regulator. The directors and responsible officers of a company have to declare under registration unspent criminal convictions for financial crimes, terrorist funding, money laundering and fraud, but there are two difficulties with that. First, the punishment for not doing so appears to be no more than three months in jail, and, if one is rocking along with £100 million, that is probably worth it. The other thing is that it appears that the FSA has absolutely no means of checking the information because it has no access to the Criminal Records Bureau. Registration is clearly not effective; we need to look at regulation for all these companies.

I am grateful to the hon. Lady; she has taken a number of interventions, although she has limited time to make her case. I congratulate her on securing the debate. Does she share my concern? I have raised constituents’ cases with the FSA, but I have not had any replies at all.

I have one quote from the FSA complaints department. It says:

“We are unable to look at your case under our complaints scheme as your complaint falls outside the scope of the scheme…However, we will deal with the complaint…It appears that registered companies are not part of the complaints scheme.”

It seems a little confused. To be honest, if the FSA does not know what falls within and without the complaints scheme, it will be difficult for any member of the public who has been brought into the situation with a false sense of security.

I congratulate the hon. Lady on securing this important debate. On behalf of my constituent Chris Neath, who lost more than £3,000 in this scandal, I would like to ask this question. Does she agree that we must remove the confusion among the public between registration and regulation? We should make it clear in this debate that the FSA must take a much stronger line on companies of this size and this sort.

Absolutely. I hope that that will be part of the outcome. I ask the Minister in particular whether he would agree to meet members of the group Action against Crown Currency Exchange, me and other Members whose constituents have an interest, so that we can explore what might be done. It certainly seems to me that the legislation does not allow the FSA to operate in an effective way. Perhaps it is for the House to deal with that.

What message can the hon. Lady give to my constituents, and many others across the country who have lost large sums of money, about what hope they might have of compensation?

I am an optimist, so I hope that we might be able to do something, but it would appear that the directors of the company have operated through a loophole in the scheme. I suspect that they were very savvy and knew exactly what they were doing. They have registered rather than being regulated or authorised. Some 13,000 people have lost £20 million and there is enormous distress and dismay about what has happened.

I am grateful to my hon. Friend for giving way, as I am conscious that time is pressing. I join colleagues in congratulating her on securing this debate. Does she have any idea about how many other companies are registered but not regulated by the FSA?

I am not aware of the numbers; I am aware only that there is a peculiarity relating to 547 small payments institutions that do not seem to be regulated as other companies are. I hope that the Minister will give some response to the questions that have been raised.

Does the hon. Lady share my concern that the business of Crown Currency Exchange was apparently regarded as low risk, when anyone with a basic grasp of economics could see the massive risk inherent in currency fluctuation up to a year in advance?

It is certainly clear that a number of people alerted various sections of the authorities. A year ago, the Financial Times and the financial pages of The Daily Telegraph and The Mail on Sunday were raising concerns, and they were right to do so.

I congratulate the hon. Lady on securing this debate. I have had a response from the FSA. It says:

“In our judgement it would not be possible for the FSA to ban firms such as CCE from describing themselves as “registered for payment services”. Any amendment to the register requirements in the Payment Services Regulations would be a matter for HM Treasury.”

Will she ask the Minister whether he will consider that?

I congratulate the hon. Member for Wells (Tessa Munt) on securing a debate on this important topic. The fact that there are 40 Members here tonight demonstrates the widespread interest across the House in what has happened to Crown Currency Exchange. I am glad to have the opportunity to explore the collapse of Crown Currency Exchange and touch more broadly on how foreign exchange services are regulated.

I share the hon. Lady’s concern about the impact of the failure of Crown Currency Exchange. I have enormous sympathy for the 13,000 people who have been affected by its collapse. They are honest, hard-working people who have been hit hard and, in some cases, the losses have been considerable. I welcome the work of the administrators in investigating the issues surrounding Crown’s collapse, and their efforts to recover as much money as possible for the consumers affected. The administrators have written to the creditors, and have held a creditors’ meeting to discuss their proposals. They will continue to review Crown’s trading operation, its financial position and the conduct of its directors. I look forward to receiving the administrators’ report, so that the Government can consider what lessons can be learned from it and assess what might need to be done to protect customers in future.

Crown Currency Exchange operated an online bureau de change—put simply, it bought and sold currency over the internet, which is quite normal in modern day currency exchanges. However, what separated Crown from other operators was that it was among a minority of companies whose customers paid for their foreign currency weeks or months before they were due to receive it. Some other aspects of its operations were also unusual. It offered much better rates than those on the high street and enticed customers by offering special deals purporting to be from cancelled contracts that did not exist. It did not hedge its exposure to foreign exchange rate changes, so it was at risk if sterling moved against it, and it took payment in full and in advance, for up to a year before delivery. In addition, it did not accept payments by debit or credit card. Crown’s business model was an outlier, which posed risks to the firm and, as we know, to consumers. The way in which Crown operated meant that consumers lacked protection because they were unable to pay by debit or credit card.

I do not wish to prejudge the causes of Crown’s failure. The administrators’ final report, which is expected in a few months, will go over that in detail, and look at the conduct of the company’s directors. Let me touch on the regulatory questions raised by the failure. As we have heard, Crown Currency Exchange was registered by the Financial Services Authority as a small payments institution, which means that it managed payments from one person to another. Such institutions may handle the remittances from migrant workers to be sent home to their families, or they may offer an internet service for making payments in competition with the banks.

European legislation—the payment services directive—provides for light touch regulation of small payments institutions. That was the case with Crown, which had some reporting obligations to the FSA. However, the FSA was not required to exercise any prudential regulation, such as oversight of capital requirements over Crown; it was required only to oversee its payments. Buying and selling foreign currency is not a regulated activity, so Crown’s foreign currency sales were not regulated by the FSA. The regulatory requirements relating to foreign currency sales are limited to quoting rates clearly, which the FSA oversees, and complying with money laundering legislation, which Her Majesty’s Revenue and Customs oversees. The money laundering rules are designed to fight terrorism and crime, not to protect customer deposits. That is why neither the FSA nor HMRC was in a position to investigate or address any problems with the business model of Crown Currency Exchange.

A number of my constituents have also lost money in this case. I recognise the limited remit of the FSA, but should it have registered CCE when, as I understand it, one of CCE’s directors had a criminal conviction? Was that an example of maladministration, or will that be reviewed?

Often in these cases—I do not want to go into detail on this—the FSA is dependent on disclosure by directors. As the hon. Lady said, the FSA does not have the power to access criminal records to enable it to find out whether directors’ disclosures are accurate.

The question that we need to address is why foreign exchange services are not more tightly regulated. Traditionally, buying and selling currency is the same as buying and selling any other commodity, whether it is gold and silver or food and drink. With the exception of Crown, this kind of trading has been, and remains, a low-risk business. It is something that millions of us do day in, day out, whether at the post office, in banks or at bureaux de change, without a problem. But Crown’s business model was different, and what should have been straightforward transactions led to substantial losses for its customers. I accept, of course, that Crown has inflicted substantial losses on customers. The Government are anxious to learn the lessons from this failure and to take what action may be needed, including regulatory changes.

A lot of people have lost money, including people in my constituency and loads of others. Does the Minister think that, as in the case of Equitable Life, it would be a good idea to make sure that the financial ombudsman has a look at this case?

It is not a matter for the ombudsman—it is for the administrator to decide what further actions are needed. As I said, the problem is that the nature of this business was such that it fell outside the regulatory perimeters. It is not covered by the Financial Ombudsman Service or the financial services compensation scheme, so there is a distinction between this case and the one to which the hon. Gentleman refers.

I should like to make some progress, as there are important points that I want to make by the time I finish in seven minutes’ time.

I want to reassure hon. Members that I am anxious to protect customers and that we should learn lessons from this. I would point out, however, that there are 1,480 businesses operating as bureaux de change in this country, the vast majority of which are retail outlets dealing with customers face to face. The majority of these firms are not taking payment in advance or entering into forward currency contracts. They do not expose their customers to the kind of risks that Crown appears to have done.

No, I am going to continue.

The regulation of these businesses, including capital requirements, would impose costs on them and on their customers, so we must be sure that the benefits of regulation outweigh the cost to consumers. I assure hon. Members that we are looking at the other companies to see if any are operating in the same way as Crown. We have not yet identified any, although the investigation is still ongoing. I undertake that the Government will seek to learn the lessons from Crown’s failure, once we have all the facts, and take whatever action is appropriate.

Let me continue for a bit longer.

I recognise that there are innocent victims at the heart of this, but because Crown’s activities are not regulated by the FSA, its customers are not covered by the financial services compensation scheme. Crown did not accept credit card or debit card payments, so its customers are not covered by the protection they offer, and I am afraid that they are therefore awaiting the outcome of the administration process. I believe that it is vital that consumers understand their rights and what products and services are covered by the FSCS. I welcome the fact that the FSCS is launching a campaign in the new year to raise consumer awareness and encourage them to seek more information on what is and is not covered by the scheme. However, I also believe that there is a responsibility on companies to be up front with their customers about the protection that is available if something goes wrong, particularly where the business is complex, as was the case with Crown.

Exactly what purpose is served by registering a small payments institution with the FSA? Given that the FSA makes it perfectly clear that it denies any regulatory involvement with small payments institutions, of which there are 547, I am not entirely sure for what one is paying £500.

The hon. Lady makes an important point, but the reality is that this activity falls outside the regulatory perimeter of the FSA. The reason these businesses are registered with the FSA is that when the payments services directive was introduced, there had to be somewhere for these businesses to be registered, so the decision was taken to register them with the FSA. That decision was taken not by this Government, but by the previous Government. The hon. Lady is right that that situation leads to some confusion for consumers. The reality is that such businesses were not regulated by the FSA. The same applies to the other 1,500 bureaux de change that operate under this model.

I thank the Minister for giving way. Given the scale of the issue with 13,000 people having been affected, will the Minister tell us more about the role of Barclays bank?

Barclays had a limited relationship with Crown. It did not lend money to Crown, but simply provided it with a bank account. It raised a number of questions with Crown, but the answers gave no cause for concern. It acted simply as Crown’s bank and had no engagement in the business.

I could ask the Minister when he believes that my constituents will receive money and how much, but I want to come back to the fact that the company was classed as a small payments institution, despite its turnover putting it in a category that meant it should have been regulated. Is he in a position to instruct the FSA to look at the more than 500 other companies that are small payments institutions to see whether they fall into a regulated category?

When the €3 million figure is exceeded, a company should be regulated, but that figure refers to the average monthly payment transaction. A company can therefore be turning over €36 million a year and still fall below the threshold for registration.

To conclude, I agree with the hon. Lady that the collapse of Crown Currency Exchange has hit 13,000 innocent victims and that, in some cases, the losses have been substantial. We all agree that that should not happen again, that we have to learn the lessons from Crown’s failure and that we must take all the steps necessary to ensure that consumers are better informed about the risks that they take and the rights that they have. We will be able to determine the action to be taken by the Government or the regulators only once we have received the report. We will look at the costs and benefits of regulation. I remind the hon. Lady that in last week’s debate on the retail distribution review, she pointed out the risk that more regulation poses to businesses.

We must ensure that there is proper regulation for consumers. We must learn the lessons from Crown to ensure that we put the right protection in place for consumers, given the risks involved. I assure hon. Members who take an interest in this matter that I will keep them up to date with what is happening with Crown. I recognise from the number of hon. Members present in the House tonight how important—

House adjourned without Question put (Standing Order No. 9(7)).