I call Guto Bebb to move the motion. You have 10 to 15 minutes.
I beg to move,
That this House believes that the Financial Conduct Authority in its current form is not fit for purpose; and has no confidence in its existing structure and procedures.
It is four years since I first raised the issue of interest swap mis-selling in this Chamber. Since then, I have led three Back-Bench business debates on the issue; an Adjournment debate on the Connaught Income Fund, which is another example of financial mis-selling; and a debate on the global restructuring group. I have also contributed to an effort to secure a debate on the future of the Royal Bank of Scotland. It is clear that I have attempted to utilise this House to bring to the attention of Members and the wider public the issue of financial mismanagement and the lack of financial regulation in the marketplace.
Some people have argued that this debate and this motion are premature. Given the evidence and information that I will present, I argue that they are long overdue. We must remember that the Financial Conduct Authority has a clear and specific mission statement:
“We aim to make sure that financial markets work well so that consumers get a fair deal.”
“This means ensuring that the financial industry is run with integrity, firms provide consumers with appropriate products and services, and consumers can trust that firms have their best interests at heart”.
I believe that the five examples that I will give in my opening speech make it clear that the Financial Conduct Authority is failing against that mission statement.
I will highlight five areas. First, I will touch on the voluntary redress scheme for the mis-selling of interest rate swap products. When I am feeling positive, I think it is a glass-half-full redress scheme, but most of the time I believe that it is a glass-half-empty one. The fact that the glass is half empty after four years is something that I take quite personally.
Does my hon. Friend agree that the glass being half full has been okay for some constituents, but that for those who are looking for consequential losses as well, the glass has been absolutely empty?
My hon. Friend makes an important point about one of the failures of the redress scheme. Too often, the FCA has hidden behind the argument that 80% of the people involved in the redress scheme have accepted their outcome. What it is not willing to admit is that people have accepted the outcome under duress because they needed to keep ahead and get their lives back on track.
The other four areas that I will talk about are the Connaught Income Fund, the FCA’s involvement in the report on the failures of HBOS, the promised report on the global restructuring group and the decision not to move ahead with the review of banking culture, which was communicated on new year’s eve.
My hon. Friend is aware of the case of my constituents, Mr and Mrs Bennett from Dorrington, which I have shared with him. They have been treated appallingly by RBS and there has been a complete lack of interest from the FCA. I am grateful to him for taking this matter on and urge him to continue the campaign most vigorously.
I am grateful to my hon. Friend for those comments. I will touch on RBS’s involvement in the redress scheme.
There are concerns about the way in which the interest rate redress scheme was put together. It was a voluntary agreement. One of my first questions, which I still have, was about the arbitrary way in which 10,000 businesses were excluded from the scheme for no apparent reason. Because of an arbitrary decision by the FCA, those businesses were excluded from any means of support under the redress scheme. That decision still is not fully understood. I have raised that issue before and would be more than happy to hear the Minister’s comments on it.
Of more concern is the fact that, throughout the process, there has been a lack of willingness from the FCA to explain what they are doing. For two years, the redress scheme was in existence, but the FCA did not share the rules of the scheme. Businesses that had been declined redress within the scheme were appealing the decisions without knowing what the rules were.
Does my hon. Friend accept that people such as my constituent, Larry Berkovitz, have been so frustrated by how long, drawn-out and time consuming the process is that they feel as if they are hitting their head against a brick wall to try to get justice?
I sympathise fully. When I established the all-party parliamentary group on interest rate swap mis-selling, I expected it to be closed within a year. Four years later, I am still raising debates on the issue, so I share the concern that people are knocking their heads against a wall and getting nowhere.
The Treasury Committee intervened and the FCA finally published its rules in February 2015. Therefore, it can be argued that for two years, every appeal was being made in the dark. The release of the rules led to a further complication. It suddenly became apparent that the way in which the customers of RBS were being treated in the redress scheme was significantly different from the way in which the customers of other banks were being treated.
The APPG did a significant analysis of cases that had been through the redress scheme. It showed clearly that the chances of getting a swap for a swap outcome was much stronger for RBS customers than for customers of other banks. A swap for a swap outcome basically means that the redress to which someone is entitled is significantly less than it would otherwise be. The reason was that RBS appeared to be relying on a generic condition of lending that was not deemed significant by some banks within the review, but that, for some reason, was deemed sufficient for a swap for a swap outcome by RBS.
I met RBS with other members of the APPG to highlight the discrepancies. We were told that the rules that were released to the Treasury Committee were not rules, but principles. Although those principles had been established for the scheme, apparently 11 different methodologies were agreed with 11 different banks. It is arguable that the Treasury Committee was misled because when it asked for the rules, it is unclear whether it got rules or principles.
I ask again: if a business does not feel that it received an adequate offer from a bank, how can it challenge the decision if it does not know what the methodology was? I met the FCA, because RBS was perfectly happy about this issue. It said, “We have a methodology that we have agreed with the FCA and we are delivering on it.” When I met the FCA, it confirmed that it had different methodologies within the scheme, but, again, it did not share those with me. If an RBS customer is unhappy with their outcome, it is difficult for them to argue their case, because they are not being provided with the information that they need to do so.
Does my hon. Friend agree that the FCA ought to look at transparency, speed and fairness? It seems to me that the FCA has taken no regard of the fact that many of our constituents—probably running into the hundreds of thousands across the country—have lost tens of thousands of pounds. In many cases, these are elderly people who were relying on that money to keep them into their old age.
I endorse those comments completely.
Swap for swap outcomes are much more likely for RBS customers and the percentage of non-compliant sales that do not result in a tear-up of the agreement within RBS has gone from about 40% to about 60%, which is not in line with other examples. I would argue that the voluntary scheme that the FCA put together is not delivering and is not being monitored in accordance with the FCA’s mission statement. I will leave that issue there because I have spoken at length about interest rate swap mis-selling in this Chamber and made my concerns known time and again.
When the voluntary redress scheme was announced, we thought that the inclusion of consequential losses was a pleasant surprise. I am afraid that we were being overly optimistic. Our analysis of the redress scheme showed that in 50% of the 3,104 cases that we looked at, no consequential losses were received, and in 85% of the cases that did receive consequential losses, they amounted to less than £10,000. I have personally seen dozens of well-argued cases in the redress scheme that have been rejected by the banks without an explanation. Even worse, the business is allowed one appeal against that decision without knowing the basis on which it has been rejected—it has one opportunity to challenge, and invariably that challenge fails. On consequential losses we are again failing businesses.
Time and again cases go to court. They are often settled outside court, where the settlement will be better than what was offered under the redress scheme, and that should be a cause of concern for the regulator. Of perhaps even more concern to Members of the House is the fact that time and again gagging orders are placed on those settlements by a taxpayer-funded bank on the back of taxpayers. I find that utterly unacceptable.
Let me move on to the Connaught Income Fund, which creates a real problem concerning regulation in this country. The regulator was informed not of mismanagement but of fraudulent behaviour, yet it took four months before it put a notice on its website to highlight its concerns and say that the fund in question was not as safe as a bank account, and a further year before that fund was wound up. In the meantime, between the whistleblower informing the regulator about the problem with Connaught and the winding up of the scheme, more than half the total investments into the Connaught income stream occurred. It could therefore be argued that the regulator was responsible for at least half the fund.
Dr Eric Saunderson is one of many constituents who made significant losses under the Connaught investment scheme. He is not just frustrated by the inordinate length of time that the FCA is taking to investigate that and decide what compensation might be payable, but he is still unclear as to whether that compensation—once decided—will be paid directly to investors or put into the suspended Connaught fund.
My hon. Friend makes an important point, and there is a lack of clarity on that issue. Only last week the FCA decided to publish on its website the fact that there has been a settlement between the liquidators and Capita. Interestingly, the decision to publish that statement on its website breached the confidentiality agreement. Therefore, the regulator was commenting on a settlement, but the parties to that settlement were not able to offer any advice because there is a confidentiality agreement. The FCA has a track record of being accused of breaching confidentiality, but to publish the fact that it is taking a degree of responsibility for the outcome is utterly unacceptable in view of the fact that the liquidators are stating categorically that they are not associating themselves in any way, shape or form with the statement, that they do not agree with aspects of that statement, and that the only reason they had to force a settlement was that the mediation that the FCA decided to try to arrange was not successful. Indeed, the decision to finish the mediation was made without consultation. For the regulator to make a statement on its website that is then categorically denied by the parties to the agreement is a matter of concern.
Does my hon. Friend agree that with the Connaught inquiry the FCA has been too slow and not transparent enough for investors?
Of course I agree, and I will quickly run through my points about Connaught, because there are questions to ask the regulator. Will the settlement result in full compensation and a settlement for investors? Probably not. How is the settlement relevant to the FCA’s ongoing investigation into the operators? We do not know. Is it correct to state that the FCA was involved, or is that simply because the litigators were in a situation where the failure to mediate the decision to hold an investigation took place without any consultation? Is this settlement better than what was almost agreed under the FCA’s mediation process? If it is, why 18 months down the line have investors waited even longer for a settlement?
My hon. Friend has done a lot of work on this issue, including in the all-party group on interest rate mis-selling during the last Parliament. The problem is that we are still here and the FCA seems to be blundering around in the dark—we are talking about people’s money and investments.
I have constituents—I will not mention their names because I do not have their permission—who are out of pocket by a large amount of money. They are struggling while the FCA plays around and does nothing about this issue. It should start doing what it was supposed to do in the first place.
The mood of the House is fairly clear. Indeed, every time we debate these issues the House has been clear, but I am afraid the regulator has not responded.
I am conscious of the time, Mr Deputy Speaker. I promised to touch on three other areas, but I will do so quickly. There is a real question mark about why the decision to cancel the review into banking culture was taken at short notice, with an announcement made on new year’s eve—that was surprising in itself. Perhaps even more surprising is that the decision was made by FCA executives without consultation with the FCA board—the FCA itself has questioned governance within the organisation. If a decision of that importance is made without advance consultation with the board, the question of governance is important.
The review into banking culture was part and parcel of the business plan for the FCA, yet suddenly it disappeared. Even more importantly, in a public meeting on 22 July, the FCA stated categorically that that review was an essential part of the new management of the banking sector. When that was pointed out to the FCA when it announced its decision to curtail the inquiry, it denied to The Financial Times that the issue of a review had ever been raised at a public meeting. However, the minutes of that public meeting are clear, and the regulator was stating an untruth to our No. 1 financial paper. That does not give me any confidence in the regulator.
There are two other reasons why we need this banking review. First, a review of the report commissioned by the FCA into HBOS highlighted careless and selective use of evidence, factual inaccuracies and a lack of context, express and implied criticism of individuals that was not substantiated by the facts, undue reliance on the evidence of certain individuals, and delay—the report took three years to be produced.
Will we ever see the report into the Global Restructuring Group? Many hon. Members have come across GRG. A section 166 investigation was ordered by the FCA in 2014, but we are yet to see any evidence of it. The acting chief executive, Tracey McDermott, stated on 21 January that that investigation is in the pipeline, but I wonder whether we should have any confidence in that. After all, less than six months ago the review into banking culture was in the pipeline. I am concerned about the Global Restructuring Group and whether we will ever see the section 166 report.
In conclusion—I am rushing because of time—all those issues raise significant questions. Does the regulator have a sweetheart deal with RBS? That is a serious yet reasonable question to ask. Considering the way that the interest rate swap redress scheme has operated, there is a question mark over why RBS is being treated differently? Has the FCA allowed the banks off the hook too easily? Is the regulator acting in a timely fashion? All those questions need to be responded to, and I argue that there is real doubt about them all.
The regulator must work with integrity and be independent to deliver in the interests of a healthy financial marketplace. It must ensure a system that treats customers fairly, but to do that it needs the confidence and respect of stakeholders. That respect and confidence has been lost in the outside world. Whether it has been lost in this Chamber remains to be seen, but when a regulator’s integrity is being questioned to this extent, there are questions to be answered by that regulator and by the Treasury responsible for it. I thank hon. Members for their time, and I hope that other speakers will raise other important issues about the way that the FCA is operating.
Several hon. Members rose—
Order. I now introduce an eight-minute time limit.
My constituent, Steven Jones, is a successful entrepreneur and businessman in my area, who was advised about and then sold an interest rate hedging product by RBS in 2009. RBS’s own investigation showed that the cost of the swap was never mentioned at all, but instead a series of emails showed that a section of RBS was desperately keen for such products to be sold.
The evidence of mis-selling is provided by RBS and is done so without ambiguity. However, the FCA system allows RBS and other banks to run their own systems of redress. Mr Jones has lost a significant amount of money through no fault of his own. He was mis-sold and misled on the product and the RBS documents, explicitly annotated, show that that was the case. He is left only with the choice of going to court against a Government-owned major bank, something that in itself would be financially extremely difficult to do. That highlights and strengthens the case made by the hon. Member for Aberconwy (Guto Bebb). There are many such people: individual entrepreneurs who have not been dealt with properly because of the rules brought in by the FCA.
Let me highlight a second case in an entirely new area, which was brought to me by Helen Scott of Eris FX. When people buy a property or car abroad, payment will be needed in the national currency where the purchase is legally taking place. This means people will need to access the Forex markets. Generally, they cannot do that themselves and need to use a broker. This market is estimated to be worth £60 billion a year. Some of the biggest specialist brokers are methodically misleading consumers with currency converters in their adverts and on their websites, which supply a rate that will not actually be offered.
Ms Scott complained to the FCA, which refused to act. She also took the case to the Advertising Standards Authority, which, on 17 September, judged in her favour that the action was non-compliant with the Consumer Protection from Unfair Trading Regulations 2008. Those are precisely the regulations given to this sector by the Department for Business, Innovation and Skills in September 2012. This means that the companies have been non-compliant with the Committee of Advertising Practice code and, by definition, that is a condition of their authorisation by the FCA under the payment services directive 2009. Game, set and match, we might think. However, provided with all the evidence by the ASA that the companies are in breach of its rules and advised that it must act, the FCA says, “It is nothing whatever to do with us.” It has knowingly failed Ms Scott and many others who are being unfairly kept out of business, and consumers who are going for a rate that has been advertised in a misleading fashion and that they will never get. There is a lack of consumer choice and those entrepreneurial businesses that could be competitive cannot expand, but the regulator—this is in the last three months—has refused to even look at the cases.
This is more than a passing problem. The FCA ought to be strengthened, but it would appear that it is being weakened. With its culture reviewed, dissipated and destroyed, it is being neutered. Two Treasury officials and two Treasury appointees decided on the appointment of the new chief executive. Everything is about “prudential risk” according to the Bank of England and the Treasury, so much so that the head of the Prudential Regulation Authority has now been appointed the head of the FCA. The consumer champions in the FCA have been systematically removed over the past four months, leaving none in place. One can only conclude that the rights of the individual, the rights of the entrepreneur and the rights of the consumer are being subsumed to the big brother of the Bank of England and the Treasury. This leads to a question: are the Government Members here listening to the debate really going to be on the side of big brother doing down the entrepreneur, doing down the individual and doing down the consumer, or will they be on the consumers’ side? Big brother is taking over.
The two examples I gave highlight the depth of the problem. These are entrepreneurs seeking to make money legitimately by widening competition and wanting to give the consumer choice: in one case, wishing to borrow money to expand the business in my constituency; in the other case, wishing to allow people who want to buy property or to make other purchases abroad, the ability to obtain a competitive rate of exchange. In a competitive economy, that ought to be what we and those on the Government Benches cherish, nourish and enthusiastically endorse, yet we have a Chancellor of the Exchequer, with his Treasury big brothers around him, and the old lady of Threadneedle Street treating the FCA like an uncle who is hidden away except when he is wheeled out at Christmas and family events. Consumer rights are being ripped away. This House should be standing up for the individual. This House should be standing up for competition. This House should be standing up against big brother. This House should be standing on the side of the entrepreneur. That is what this debate is about. I salute the hon. Member for Aberconwy for bringing it. I hope the House will endorse what he and I, and others, are saying.
It is always a great pleasure to follow the hon. Member for Bassetlaw (John Mann). Some of my most entertaining afternoons on the Treasury Committee have been following him when he has been quizzing the Chancellor. Who can possibly forget that wonderful moment when he asked the Chancellor whether he had ever visited a Greggs bakery, starting off what then became known as the “omnishambles Budget”? He works very hard.
It is a great pleasure to speak in yet another debate secured by my hon. Friend the Member for Aberconwy (Guto Bebb). He has been a truly extraordinary campaigner in this particular area. Without a shadow of a doubt, he certainly deserved the honour he received in Wales for being the Welsh MP of the year in 2013. He has devoted a huge amount of forensic energy to looking into this subject. I have certainly enjoyed very much the privilege of working with him on the huge area of interest rate hedging products and Connaught, and trying to hold the regulator to account. Without his forensic help, we would have had very dull Treasury Committee meetings. It was he who managed to get hold of the smoking gun about how the regulator has turned its focus possibly to being more supportive of banks than the consumer.
When we consider the content of the speeches in this debate, it is fair to say that the evidence presented to us illustrates that the regulator is not necessarily always entirely fair to the consumer. The evidence supports the perception that the regulator has a pro-bank stance. We heard about the GRG report. If one wants to know what a long-delayed report looks like, look at the HBOS report. We see the guillotine of the PPI claims coming through in the not-too-distant future. We have seen the reverse of the reverse burden of proof for senior managers—we spent a lot of time debating that in the previous debate—and we have seen a change in the terms of the thematic review. I argued that this was a wasted opportunity to change the banking culture.
I completely agree that this is all good evidence for how the regulator is not necessarily standing up for the consumer, but when we look at the motion of no confidence in the regulator, it is fair that we need to take a slightly more rounded view. Have we perhaps, on occasion, been guilty of what sports commentators do when a poor goalkeeper successfully saves many, many shots, but, when he lets through one crucial goal, is criticised by everybody for not being up to the job?
I share the hon. Gentleman’s concern about honing in only on the bad news, but that is cold comfort to the many constituents of ours facing these difficult problems. My constituent Mr Lilley and his family own a small glass and DIY business in the village Marske. They were mis-sold an interest rate hedging product by HSBC and are still owed thousands of pounds because of the difference in the premium. Is that not a perfect example of how the FCA is failing to investigate? This issue is of huge personal significance to our constituents—
The hon. Lady speaks well, and should take as long as she can to make her point.
Order. I will make that decision. I do not want us mentioning football either, as I watch Bolton Wanderers. I also ask the hon. Gentleman to talk to the Chair, not the Chamber.
I apologise, Mr Deputy Speaker. I have been here for five years, so I should know to take this much more seriously.
The hon. Member for Redcar (Anna Turley) is absolutely right. Huge numbers of people have been badly let down by the redress scheme.
I am an Everton football supporter, and we have been patient with Tim Howard. It is not that he made one mistake and allowed one goal to be scored; he has conceded half a dozen such goals this season. It is the same with the regulator. It is not the one mistake that we complain about; it is a pattern of behaviour.
I am regretting using the footballing analogy. I am not actually a huge football fan myself.
We have to look across the piece. The FCA has undoubtedly got it completely wrong in many cases—on interest rate hedging products and other things—and it is right that Parliament holds it to account, including through bodies such as the Treasury Select Committee, as a member of which I have a different point of view. I do not share the frustrations of those needing these debates or trying to get appointments upheld by the regulator; I can go along and get stuck in, along with other Committee members. That is the right way to do it.
It is also important to consider the successes. The FCA has managed to bring substantial fines for foreign exchange and LIBOR rigging. It even managed to bring a case through the Serious Fraud Office that sadly resulted in no convictions last week, when six foreign exchangers, who allegedly tried to fiddle the fixings, were acquitted. None the less, to get it to court was quite a success. The FCA has taken over responsibility for consumer credit and debt management from the Office of Fair Trading. It has protected consumers by banning retail sales of contingent convertibles—a technical thing to do with the resolution of failing banks.
Last February, the regulator published a paper aimed at providing help for firms that wanted to look after vulnerable consumers. On encouraging competition in the banking industry, the regulator, along with the PRA, created a challenger bank unit in January to help challenger bank entrants by providing the best regulation and thereby encouraging competition in the banking market. It has also provided an innovation hub, specifically aimed at the “fin tech” area, to help new entrants into the financial services sector to navigate the authorisation process. The regulator is, therefore, trying to do a number of things, and we need to be careful not to throw the baby out with the bathwater.
People worry about several issues. There is a big question about whether the Government are interfering with the regulator. Have they been interfering directly and explicitly? Are they taking it easy on the banks? I suspect that the cancellation of the thematic review might be a red herring. Most banks, given the 8% increase on their corporation tax rate, would argue that the Government are not being lenient on them. The Government are levying a bank levy that will help to repay taxpayers for all the money used to bail out the banks.
The reverse burden of proof has been reversed, but the implementation of ring fencing by 2019 will come at a fantastic cost to the banks of several billion pounds, in order to make sure that when the next financial crisis hits—there will definitely be another one—the collapsing banks do not take down other banks with them.
My hon. Friend is making a strong case for the role of the FCA in terms of systemic, high-level regulation, but does he think it is fit for purpose in protecting consumers, entrepreneurs and individuals who, from that high level, might not look so important?
That is obviously the whole point of the debate. The answer, overall, is yes, but I think the regulator gets it wrong on occasions, which is why we have the Treasury Committee and debates such as this—to hold its feet to the fire on specific issues, such as those raised by my hon. Friend the Member for Aberconwy.
It is important to remember that this is a conduct regulator for a global business. It is worth bearing it in mind that 2.2 million people work in the industry. It represents about 12% of our GDP and generates about £65 billion a year in tax receipts. This industry is a global industry, and we should be careful about criticising it so vehemently by agreeing on a motion of no confidence. What message would it send to the rest of the world about our ability to regulate the huge amounts of international capital—running into trillions of pounds—that comes and finds a safe haven here in the UK with a regulator it can trust? If we say that the regulator is not fit for purpose, it will send a profound message to a significant part of our economy.
We need to cast an eye to the new chief executive. Andrew Bailey, who is coming from the PRA, has been in front of the Treasury Committee and the Banking Commission many times. I for one have found no reason not to think him an extraordinarily pragmatic, intelligent and wise regulator. Time will tell, and we will have to see how he gets on at the FCA, but it is important that he starts his career at the FCA with our good will, not with the feeling that the FCA is a problem to deal with.
Finally, I want to confront the big question about the possible interference of the Treasury. No matter how many times I ask people—either explicitly or by trying to get them drunk—I can find no evidence of any interference from the Treasury in the work of the regulator. There is possibly an implied interference, however, and one solution could be to give the Treasury Committee a power of veto over the hiring of the next chief executive.
My reason for speaking in this debate leads on from my Adjournment debate last Monday on the mis-selling of pensions, in advance of which I came up against the FCA for the first time. As a not very qualified and not very long-standing MP, and as someone who has never really had to deal with any of the regulatory bodies, I went to the Library for some background. I asked what turned out to be a very silly question. I asked for a list, going back to the 1990s, of regulators and what they were responsible for, only to be informed by the relevant expert in the Library that it was a huge piece of work and that he could not get it to me in time for this debate. I now perfectly understand that.
My point in telling everyone that and showing my complete ignorance is that normal, everyday people are in exactly the same boat. They do not always understand where to go to get redress. We are debating the motion today, on the FCA, but that does not mean much to people in the street. They do understand, however, that they do not seem to be getting a very good deal. When I listen to more erudite and learned Members—I do not mean that in the legal sense—I understand even better how my normal, everyday constituents feel. This whole mess of regulation and responsibilities and the attempts to fix it by bringing forward other regulators dealing with yet something else has to stop.
For some of my constituents—I have mentioned Mr and Mrs Bennett from Dorrington—the litigation costs are absolutely exorbitant, which prevents many constituents from pursuing that line. I echo the hon. Lady’s sentiments that people have nowhere to go and no one to turn to in order to explain the appalling things that have happened to them.
I thank the hon. Gentleman for that intervention, which absolutely confirms what I think and what I said here last week. People cannot afford to go to litigation. Even when they do go, they do not get the satisfaction that they should get because of the mish-mash of regulators and mish-mash of regulations.
I shall sit down at this stage because I believe I have made my point quite clearly. Something needs to be done to take everything back to the stage where people trust regulators, trust banks and trust financial products.
I am grateful to you, Mr Deputy Speaker, for the opportunity to speak in the debate. I congratulate my hon. Friend the Member for Aberconwy (Guto Bebb) on securing the debate.
I declare an interest: before coming here, following in the footsteps of my parents who ran their own insurance and financial advice business for 45 years, I ran my own regulated insurance brokerage for nearly 20 years. It is fair to say that I have seen first hand the evolution and revolution of the industry over quite a sustained period of time. I fear I might be one of the only Members tonight to stand in support of a particular sector of the industry.
I could talk about many issues, but I want to use my experience and understanding of this area to focus on the impact of regulation on the insurance industry, specifically the insurance broking sector. There is an understanding of the need for, and acceptance of, fair regulation by the insurance industry as a whole, but at the forefront of any such measures should always be the principle to protect the consumer not just from financial risk, but from professional negligence. To achieve that, a regulator should work in partnership with the profession to understand the service it provides and then to create an effective model that targets the key concerns. That regulatory solution should be delivered in a cost-effective and proportionate way that does not unjustly burden businesses of differing sizes and incomes.
Unfortunately, it has not been my experience, or that of many representatives of the insurance industry I regularly speak with, that that is currently the case with the FCA. General insurance brokers contribute 1% of GDP to the UK economy, arranging 54% of all general insurance and 78% of all commercial insurance business. In 2013, the British Insurance Brokers’ Association commissioned research, carried out by London Economics, which found that the UK broking market is the most expensive on the planet in terms of the direct cost of regulation. The UK’s cost is double that of its next global competitor, Singapore, and more than four times the cost of other major European markets with which it is supposed to be on a level playing field. Our regulators’ approach to gold-plating has seen the UK become the butt of European jokes, with the recently retired European Commission head of insurance referring to UK gold-plating by the FCA as “Sauce Anglaise”.
The FCA recently increased the minimum fee for the A19 general insurance intermediary fee block by 8.4%, with the largest UK brokers privately indicating that they pay “comfortably” over £1 million a year in fees to the regulator. Worryingly, in its response to BIBA following the rise, the FCA indicated that, if the increase had been in line with the annual funding requirement, the rise could have been even greater—46% over four years.
The FCA recently divulged the breakdown of the A19 fee block, which showed that £16.4 million, or 56.9%, of that block is used for “supervision”. However, 75% of BIBA members are small firms with fewer than 10 members of staff and would not be subject to regular visits or in-depth inspections. Therefore, the proportion of the fee block that is used for supervision appears distorted and suggests that UK insurance brokers are paying for supervision of other, non-insurance broker entities. Furthermore, £1.8 million, or 6.3%, is used to pay for “markets”, principally the UK Listing Authority. That is not an area of regulation that general insurance brokers would face, which further suggests they are cross-subsidising others’ regulation.
In addition to the direct cost of regulation, there are also substantial indirect costs, which include the need to employ either in-house staff or consultants to ensure that the numerous regulations, thematic reviews, market studies, consultation papers and ad hoc requests for information are managed.
I wonder whether there has been a reduction in small companies. Heavy regulation often favours larger organisations, so it cuts out the entrepreneurial and small business in a market town in my constituency above a shop, while it favours the large companies, which then gouge the public for higher fees. Does my hon. Friend agree?
My hon. Friend is absolutely right, and that was indeed my experience. I was coming on to say how many firms have disappeared since regulation was introduced. To put it into context, in my final years as a broker, 80% of my time was spent working on compliance rather than being productive in my business. That was a small brokerage providing a valuable high street presence to people who needed access to somebody they knew and trusted. A clear case can be made that firms that abide by the rules should not be the ones that pay for the misbehaviours and increased regulation caused by other firms.
Another area that requires review is the Financial Services Compensation Scheme, which provides the compensation fund of last resort for customers of authorised financial services firms and rightly protects consumers of companies that have ceased trading. Currently, insurance brokers are included in the same funding pot as credit intermediaries that mis-sold payment protection insurance cover, several of which have failed, resulting in claims on the FSCS. That has led to an increase in the levy that insurance brokers face. Indeed, insurance brokers contribute 72% of that particular funding pot, but have made only 2% of the claims made upon it—a gross distortion that the industry feels is both unfair and difficult to budget for owing to its volatile and unpredictable nature. I appreciate that the FCA is currently reviewing the funding structure of the FSCS, but ask the Minister to look into how that can be fair, equitable and manageable to the broking sector.
It would be prudent to note at this point that insurance brokers do not pose the same risks as banks or insurers, owing to the fact they do not hold client money and generally have risk-transfer agreements in place. With better understanding and a working relationship with the profession, especially with small firms, I believe the FCA would conclude that the insurance broking sector is low risk and would be compelled to regulate it as such, leaving its own resources free to pursue those financial services that pose the greatest threats to consumers and the UK economy.
To conclude, the insurance industry as a whole is a vital part of our economy, which is rightly proud of its long-standing tradition of being the best in the world, but the current regulatory system is potentially putting that in jeopardy. I do not believe it to be a coincidence that the number of brokers registered with the FCA fell by 32% between 2006 and 2014. The knock-on effect of that is the great danger of limiting the choice of our consumers—the very consumers whom the Financial Services Authority set out to protect—at a time when access to good, independent financial advice is needed more than ever.
As I have said, the insurance industry is not afraid of fair and proportionate regulation, and I appreciate that the FCA has moved a long way from its predecessor, but there is so much more that it can do to achieve its purpose while still promoting a thriving insurance industry. It can do that by concentrating its resources effectively on protecting the consumer and enhancing the reputation of the industry both at home and overseas, while also securing the long-term crucial and positive impact of the broking sector on the United Kingdom economy.
I pay tribute to the hon. Member for Aberconwy (Guto Bebb) for his persistence in pursuing this cause. I counted three debates that he had initiated with the support of the Backbench Business Committee, but he reminded us that there have now been four. I spoke in the first three, and I now speak again on behalf of my constituents who have been affected specifically by the mis-selling of interest rate swap products. Many of them have been denied justice, notably those who were sold tailored business loans or hidden swaps, largely by Clydesdale and Yorkshire bank, and who have been denied any semblance of justice.
I am compelled again to mention the case of my constituent Mr Mansel Beechey of the Hen Lew Du public house, which was well known to the hon. Member for Aberconwy in his student days. That excellent establishment is in the heart of my constituency. Mr Beechey first complained about the sale of his tailored business loan—shamefully, an unregulated product—back in 2012. It took Clydesdale and Yorkshire six months to respond to that formal complaint, and even now the matter remains unresolved. Cynics would suggest that there is an expectation, or rather a hope, that it will be kicked into the long grass and disappear. The reality is that much of the bank’s lending is done through TBLs, which fell outside the remit of the FCA review, with the result that sufficient redress has been avoided.
I remember when the hon. Member for Aberconwy first told those of us who were involved in his “bully banks” all-party group—the all-party parliamentary group on interest rate mis-selling—that a voluntary review was forthcoming. There was an acknowledgement that the glass was half-full, there was an expectation that it might well fill up, and there was a hope that the proverbial spotlight would be shone. With hindsight, however, and given the bitter experience of many of our constituents, we see that the process lacked transparency and rigour, was neither robust nor effective, and was significantly skewed in favour of lending institutions.
We looked to the FCA to sort that out. When the FSA morphed into the FCA, we were assured that the new organisation would enforce rules, punish breaches, and focus on the behaviour of financial professionals. That is why there was such huge disappointment in the decision, sneaked out around new year’s eve, not to undertake a review of banking culture.
What concerns me most is that the redress scheme brokered by the FCA excluded a huge number of people, even before the process of drilling down and examining the inadequacies of the scheme. As the hon. Member for Aberconwy said in his opening remarks, it excluded many people through its definition of “sophistication”. It also allowed some commercial lending to remain unregulated. As it was so narrow and restricted, it did not deal with the reality of what went on. As it stands, it will not change or reform banking behaviour or compensate people properly.
If the FCA’s review process was transparent and fair, why were customers not given a chance to view the evidence that the banks presented to the review panel, and, if necessary, given a chance to comment on it? Why does the FCA fail to see that there will always be suspicion and mistrust while the process is shrouded in secrecy, and customers are denied an opportunity to view the evidence of the banks’ own review team? Why is the controversial issue of the offer of alternative products as part of the redress scheme not being addressed? Reviewers seem intent on suggesting that if my constituents had not take out a particular type of hedging product, they would almost certainly have taken out something very similar. That is currently the position of my constituents Mr and Mrs Collier of Aberaeron, who were offered derisory compensation and another almost identical product. Is it really the case that providing customers with an alternative product as part of the redress is a widely established and accepted principle?
Until the faults of the current scheme are rectified or remedied, and until the FCA addresses these issues— including, critically, TBLs—I am minded to support the motion. We need a truly independent, comprehensive, forensic examination, and a comparison of a sample of sales of historic interest rate hedging products involving all banks, all product types, and a range of customer profiles. We need a re-examination that relies not just on banks’ records, but on customer testimony and a full review of documentary evidence.
In the meantime, I look at the landscape of my constituency, which has clearly been targeted by tailored business loan salesmen. At one point, my constituency office was working on 30 cases across Ceredigion involving asset-rich businesses, hoteliers and farmers. We even took out an advertisement in the local newspaper to glean whether there were more cases, and they were forthcoming. Many of those businesses have now gone; some are hanging on but have been unable to grow to their full potential. Those constituents have no trust in the banks and no trust in the FCA. We regard with disdain the abandonment over the new year of the review into banking culture, although perhaps it was not altogether surprising to my constituents, given their experiences. What an indictment of the FCA!
This pattern was repeated in every constituency in this country. Every one of the hon. Member for Aberconwy’s debates on this subject has revealed a huge range of experiences. I think that we in this House all know that businesses have been targeted by the banks, but has that been acknowledged sufficiently by the regulator? It did nothing when the mis-selling was going on, despite an emerging pattern of complaints. There should be an obligation to investigate further when such a pattern emerges. Nevertheless, it continued to do nothing for seven years, and a decade on many businesses have still had no redress.
The regulatory response to mis-selling, from the FCA and the Financial Ombudsman Service, has focused on the wrong question. Instead of asking why the banks were trying to sell interest rate products at all—the culture question—the focus has been on what businesses would have done had they not picked the product they were offered. Let us take the example of Mansel and Sandra Beechey. Their product was not included in the FCA review despite the fact that fixed-rate loans were to all intents and purposes the same as a stand-alone product. The FCA continues to maintain, as have Ministers, that those products remain outside regulatory protection. There has been no compensation. Richard and Lee Collier’s case was part of a review. They suggested that they would most definitely have taken an alternative product. That alternative product was two months shorter than the one they signed up to and with a base rate that was 0.12% lower. That is unacceptable. Huw and Jackie Roberts were denied the 8% interest on over £30,000 for their business. That too is unacceptable.
I congratulate my hon. Friend the Member for Aberconwy (Guto Bebb) on securing this debate and on his tenacity in pursuing this issue. I fully support the motion. I am not at all happy with the FCA’s performance in resolving the swap issue. I have had experience of several constituency cases that have revealed a very slow process with insufficient redress, and the independent review process appears to be anything but independent. So I have no confidence at all in this FCA scheme.
This interest rate swap mis-selling scandal is one of the greatest scandals in recent decades, but because it is complicated and because it primarily affects businesses and not consumers, it has received insufficient attention from the Government and from the media. At the same time as this has been in play, the Government have been more concerned about the survival of the banking system in its entirety and about getting the nationalised banks ready for re-privatisation as quickly as possible. I can understand that, but it is perhaps for those reasons that they have not been robust enough with the FCA, whose oversight of this mis-selling has been weak, toothless and anaemic from the very beginning. This has been mis-selling on an industrial scale and we have hardly got to grips with it at all.
Several of our constituents have lost their livelihoods and businesses as a direct result of bank wrongdoing. I believe that many of the senior banking executives who were behind this scandal should now be doing time in prison, but sadly that is not the case. One of the major shortcomings of the FCA scheme is the exclusion of so-called sophisticated borrowers, based on the size of lending and the size of the company. That was always nonsense. The swaps became so complicated that even the people inflicting them on their customers did not understand them. A former colleague at my old law firm, Clifford Chance, confided in me a few years ago that these arrangements were so complicated that even the lawyers drafting them did not always understand them. Setting up a system that assumed that companies over a certain size, which were perhaps good at making and selling widgets or at providing commercial premises, could get their minds around some of these swaps is nonsense, especially as many swaps were sold with no paperwork at the time and were simply done over the phone or in meetings, and often under tremendous pressure.
As I mentioned to the House when we first discussed these issues, a company called London and Westcountry Estates Limited in my constituency was the victim of a swap mis-selling by the Royal Bank of Scotland, one of the worst perpetrators of this scandal. Matters went from bad to worse, as the company’s debt was sold off by RBS to a third party company, Isobel, which then promptly placed the company into administration. I intend to raise that sorry saga with the House on a separate occasion; it goes beyond the scope of this debate, but, inch by inch, detail by detail, that story needs to be told, and it was all done with taxpayers’ money.
The family behind that constituency company were brilliant at buying old commercial premises and converting them into small units to let on flexible terms to small businesses—the very thing we want to encourage in our economy—but they had no understanding of complex financial instruments. When they first asked me to help some years ago, it took me, with my brilliant first-class degree in law—I knew I should say that, as nobody else would—and 15 years’ experience as a corporate lawyer, days to get my head around the swap they had been sold, which was completely inappropriate for their business. How on earth were they supposed to understand it? But because they were, ludicrously, deemed “sophisticated borrowers”, they were excluded from the FCA scheme and are having to resort to litigation to get justice. I believe they will win and win heavily, but it should not be necessary and it sickens me that RBS is defending this litigation with taxpayers’ money—that just does not seem right at all. I also believe that the RBS executives responsible for selling these swaps and for placing the company into administration, even though it never missed a monthly or quarterly debt repayment, should be prosecuted under criminal law and face whatever charge the criminal law throws at them. I intend to pursue that when the outcome of the court case is known next year and the full facts are exposed.
It is well known that I am a loyal supporter of this Government, as are you, Mr Deputy Speaker, I know. Who could not be?
Does my hon. Friend agree that the swaps—the derivatives—were deliberately made to be so complicated that our constituents would have no opportunity to understand them?
I suspect that that is the case—
Order. May I just remind everybody that the Chair certainly will not be favouring any Government, for or against?
We all knew that, Mr Deputy Speaker.
It is perfectly possible that the swaps were designed to be so complicated that they could not be understood. Primarily, they were designed in a way as to make the selling bank vast sums of commission, and it was all done in the name of commercial greed. Nobody minds a profit, but this went well beyond that. Although I am a loyal supporter of this Government, we have an FCA compensation scheme that is pitiful and, as a result, we are in danger of letting our constituents down. However, it is not too late for the Government to get a grip on the FCA and sort this matter out.
First, I particularly wish to thank the hon. Member for Aberconwy (Guto Bebb) for securing this important debate on the future of the FCA, especially in the light of recent perceived failings, and for his work on the all-party group on the Connaught Income Fund, series 1, which has done so much good work, without, sadly, getting this resolved so far.
It is because of the failings of the FCA that I am speaking today. The failure to act on warning signs in the Connaught Income Fund, series 1, led to a scandal that cost investors about £130. That is an unacceptable loss on a supposedly low-risk investment. In 2011, a whistleblower from Connaught went to the then Financial Services Authority, and one would think that with such risky investments and large sums of money being involved, it would act swiftly to prevent further sums of money from being invested under misleading terms. But it took five months for it to act, and even then it did very little. The body’s warning to consumers that the Connaught Income Fund material was misleading was simply not good enough. Indeed, the fund continued to receive investors until it was suspended in March 2012, by which time around £70 million of additional investment had occurred. What we saw here was a regulator failing in its duty to consumers and not using the appropriate powers it had.
The scandal did not stop there. Following the collapse of the scheme, the APPG, under the stewardship of the hon. Member for Aberconwy, worked with the FCA for eight months or so, seemingly positively, before the FCA pulled out of talks without warning to do its own investigation “in the best interests of investors”. There was no explanation as to why, and there has been no transparency since.
Since then, the FCA has been unwilling to engage with parliamentarians and, instead, has insisted on carrying out its own investigation, leaving many of us, including our constituents who have been affected, wondering exactly what is going on.
Secondly, I am also speaking today to represent the interests of a constituent who has been unable to seek redress after they were mis-sold interest-rate hedging products, despite being what the FCA would term an “unsophisticated partner”. They were a director of a company and borrowed £1.3 million from Nationwide in a fixed-rate loan. Embedded in the loan was an interest rate hedging product—an IRHP—which was supposed to protect the borrower against adverse interest rate changes. The use of such a product was common between 2006 and 2008; all major banks used it.
In reality, the IRHP exposed my constituent to a huge amount of risk, incurring fees to the bank, none of which was explained to them even though they were deemed “unsophisticated customers”. There was a break clause in the FRL agreement, but the breakage cost was ruinous and, in some cases, the fees amounted to up to half of the value of the loan. Break fees were not agreed on beforehand. It was only when the customer wanted to change the terms of the loan that those fees emerged.
After the crash in 2008, interest rates went to zero and have been low ever since, but, thanks to the break fees, constituents were stuck paying fixed rates with no chance of restructuring. The banks have since admitted that IRHPs were mis-sold, and a redress scheme was negotiated between the individual banks and the FCA, the subsequent regulator. Approximately £3 billion was set aside, though far less than that has so far been paid out. However, this scheme was for stand-alone IRHPs and not embedded IRHPs. In the latter, the IRHP is part of the loan contract itself, and repayment is made in one amount that accounts for the interest on the loan as well as the interest-rate protection. This places it outside of the remit of the FCA as it is classed as a “commercial” loan. Many of these loans were sold to small and medium-sized enterprises, such as that of my constituent, which had no more understanding of the complexity of hedging products than an average consumer. The Financial Ombudsman has refused to investigate the case, as our constituents do not meet its definition of “consumer”, which means that they have considerably fewer means of redress than people who were sold stand-alone products.
The inability of the FCA to act in this case, and in many others, has resulted in real problems. My constituent is stuck on a fixed-rate loan in a zero-interest economy with no ability to restructure their loan. I understand that the majority of what I have covered tonight involves banking jargon, but the bottom line is clear: the FCA is currently not operating in the full interests of consumers and its conduct in the Connaught Income Fund fiasco and the mis-sold IRHPs are just two examples of many.
Like many Members across the House, I expect the FCA, as a regulatory body, to do its job, which is to regulate and to protect consumers. I support the motion, as the FCA in its current form is not fit for purpose, and I have no confidence in its existing structure and procedures. If the Government want the people of this country to have faith in the banking system, may I respectfully suggest that they act to address the sentiments of the wording of the motion tonight?
Several hon. Members rose—
Order. We will have to drop to seven minutes to get everyone in on time.
It is a pleasure to speak in this debate and, like many colleagues across the House, I wish to place on record my thanks to my hon. Friend the Member for Aberconwy (Guto Bebb) for his tenacity in the work he does and for securing this debate.
Speaking in this debate allows me to raise for the second time an important case in my constituency involving the FCA, which I fear may be typical of cases in other constituencies. I last mentioned this issue during the debate on the sale of the Government’s Royal Bank of Scotland shares on 5 November last year. At that time, my hon. Friend the Economic Secretary to the Treasury—the City Minister—responded to some of the points I raised and subsequently followed up in writing, and I want to place on record my thanks to her for that. For the benefit of Members who were not present in November, I shall briefly outline the case and the role of the FCA in dealing with its consequences.
The case relates to a business in my constituency, Pickup and Bradbury Ltd, which was owned by a constituent of mine, Mr Eric Topping. It was a medium-sized, family-owned construction firm operating out of Romiley. It engaged in many commercial construction contracts, with clients in both the private and public sectors. It was well-regarded across Greater Manchester. However, in 1998 Mr Topping and Pickup and Bradbury Ltd allegedly fell victim to a set of actions and behaviours from RBS, the bank with whom Mr Topping had held his business accounts for many years, and specifically its turnaround division, the so-called Global Restructuring Group, which dealt with businesses in distress.
It is alleged that Pickup and Bradbury found itself in circumstances in which the bank unnecessarily engineered a default to move the business out of local management and into the turnaround division, in order to generate revenue through fees, increased margins and devalued assets. Pickup and Bradbury was forcibly moved by RBS into the Global Restructuring Group after the bank claimed the business owed it a significant debt in excess of £700,000. My constituent acknowledges that some debt was owed but that the business was perfectly capable of managing and servicing it. However, the crux of the case was that, although the business’s balance sheet at the time showed net assets of over £1 million, after being run through the process of the restructuring group, RBS placed a valuation on the business at negative £1.1 million, a discrepancy of over £2 million. Mr Topping and RBS are still in dispute over these figures to this day. The upshot was, however, that this led to the forced liquidation of Pickup and Bradbury, costing the jobs of all its employees and forcing Mr Topping to sell his home.
I, too, would like to pay tribute to my hon. Friend the Member for Aberconwy (Guto Bebb) for his hard work on this issue. Does my hon. Friend the Member for Hazel Grove (William Wragg) agree that the real tragedy of many of the scenarios that have been played out in constituencies up and down the country is that it is not simply businesses or individuals who suffer. The suffering is also felt by a whole range of employees, whose jobs have been liquidated in this way by the banks?
My hon. Friend is absolutely right to raise that point. Too often, perhaps, we focus on the concerns of businessmen, but we should also focus on the people they employee, and who keep the economy of this country going.
This is about people’s businesses, jobs, homes and lives, so we must remember that while organisations such as the FCA deal with the regulation and supervision of complex financial institutions and products—subjects which most people may consider dry, and perhaps even dull—these matters have a real human cost, which my hon. Friend just alluded to, beyond just numbers on a balance sheet.
Colleagues will be aware of the report by the businessman Lawrence Tomlinson, which looked in depth at RBS’s Global Restructuring Group. Tomlinson received large bodies of evidence on RBS practices, including from its business customers. The report found
“very concerning patterns of behaviour leading to the destruction of good and viable UK businesses”,
all for the sake of profit for RBS.
Just as RBS has failed to resolve the case of Pickup and Bradbury, I am sure the same can be said of many hundreds of cases across the country. The Tomlinson report suggests, in fact, that this was a widespread and systemic practice applied to many RBS customers.
Once placed in this division of the bank, these businesses were trapped with no ability to move or opportunity to trade out of the position. Good, honest, and otherwise successful, businesspeople were forced to stand by and watch as they were sunk by the decisions of the bank. The bank would then extract maximum revenue from the business, beyond what could be considered reasonable, and to such an extent that it was the key contributing factor to the business’s financial deterioration.
The reported practices of the restructuring group, if accurate, were, on a generous interpretation, dubious and questionable, but it may be truer to say unethical and totally scandalous. It is therefore no wonder—indeed, it is proper—that, following the publication of the Tomlinson report in 2013, the Government invited the FCA to investigate the alleged actions and practices of RBS and other banks. The FCA and the Prudential Regulation Authority were established by Parliament with legal powers to investigate such a situation. I am aware also that two accountancy and consultancy firms were appointed to carry out a skilled person review of the allegations against the Royal Bank of Scotland.
However, more than two years on, we are still waiting for the FCA to present its findings. In the meantime my constituent, Mr Topping, and hundreds like him across the country are unable to move on with their lives or get closure on the matter. They are unable to seek compensation or even receive an apology.
The hon. Gentleman is making a compelling case and I echo his sentiments. My constituent, Victor Singh, owns a property company in exactly the same position. His fear is that the report is being delayed by RBS as a tactic to delay the litigation and reach a more favourable position for the bank. Does the hon. Gentleman agree that the House should use this debate to call on the FCA to publish that report as soon as possible so that the litigants can have a fair hearing?
I thank the hon. Gentleman for that timely intervention. I agree with him to the extent that I hope the voice of the House this evening will be heard loud and clear, and that the FCA will proceed with a degree of alacrity that it has so far not shown.
Madam Deputy—Mr Deputy Speaker. Forgive me—I have been thrown off course. I will not use a football analogy, I promise.
The FCA review is ongoing. We were promised it at the end of the year. Now we are told that it will be published as soon as possible. For the businesses and people who have suffered as a result of malpractice in the banks—the malpractice that the FCA is charged with investigating and putting a stop to—I think we owe them better than that. Although I am sure the FCA and its partner investigators are conducting a deep and thorough review, and there are no doubt many dozens of filing cabinets full of evidence through which to sift, two years should be long enough to present at least some preliminary findings. This two-year wait is compounded by the fact that these cases of forced liquidation and destruction of viable businesses were historic and often over a decade old. That is an awfully long time to wait for justice or closure, particularly for individuals who have had their livelihoods destroyed.
The FCA, and also the Government, should be aware of the negative impact this is having directly on the individuals involved, and also on the image and reputation of the FCA. So can the Government give an assurance today about when the FCA will conclude this review? What steps are they taking to ensure that it is delivered promptly?
In my closing remarks, I want to turn to the role the FCA has to play more widely in clean-up and reform of our banking sector. Notwithstanding the issue I have just discussed, I am not one of those who readily engage in the increasingly popular pastime of banker bashing. I believe instead that we should be proud and supportive of our financial sector, not just in the City of London, but in regional financial hubs, such as Bristol, Edinburgh, and of course Manchester, where many of my constituents work.
Our financial services sector, which leads the world in its success, innovation, and efficiency, should also lead the world in regulation, fairness and propriety. We need a sector with more competition to remove incentives to make short-term decisions purely in favour of bank profit, rather than in the interests of longer-term customer relationships. The Tomlinson report makes it clear that institutional attitude was one of the core reasons that RBS’s restructuring group acted as it did, and that needs to change. The Financial Conduct Authority is responsible for ensuring that the top management of banks instil the right culture and standards of conduct in their institutions and that this remains a priority. The FCA surely faces a difficult task in this regard, and it is a task that I do not envy, but I urge it to show its mettle.
Several hon. Members rose—
Order. I am going to have to drop the time limit again because of the intervention. It will now be six minutes.
I, too, congratulate the hon. Member for Aberconwy (Guto Bebb) on securing the debate and on the work he has done on this subject over a lengthy period.
Hon. Members have come to this place with a range of concerns. My engagement with this issue was prompted by the lack of protection and compensation available to investors in the Connaught Income Fund, including some in my constituency. The Connaught case demonstrates how dysfunctional the regulation of investment services in the UK still is. The FCA line appears to be, “We’ve closed the loophole exposed by Connaught. These things can’t happen again,” but that misses the point: the rewards available from financial services will simply make people look for another loophole.
Members will be familiar with what might be termed the Ronseal test. What happens if we apply that test to the situation faced by ordinary investors—those who are neither high net worth individuals nor sophisticated investors under the Financial Services and Markets Act 2000—caught out by the next loophole?
The Treasury paper on access to financial services describes the Government’s aim as
“to ensure the financial system enables people to access and manage their financial products with confidence and ease.”
The Government’s approach is to encourage people to prepare for their retirement and to manage their own finances, just as my constituent George Devon did. When looking for a secure investment for his funds, Mr Devon did as the Government suggest and approached an independent financial adviser for advice on investments that reflected his need to obtain an income with a low capacity for risk. He was advised to invest in the Connaught Income Fund, which was described as
“The Guaranteed Low Risk Income Fund”.
Helpfully, the information memorandum defined the risk level clearly. It also said that the document itself was not aimed at people such as Mr Devon, but at experienced or professional investors or at intermediaries such as Mr Devon’s adviser, who should have been able to provide sound advice on the investment’s suitability. However, in common with approximately 1,500 other investors, Mr Devon saw his funds disappear.
One of my constituents, who is a financial adviser, and a number of his clients have lost significant amounts from investing in the Connaught Income Fund. Is the hon. Lady aware that an investigation has not even been commenced into one of the main parties, even though key information was provided to the FCA as long ago as 2011?
The hon. Gentleman makes a valid point. The delays inherent in this case are making it difficult for people in all kinds of situations to have justice and clarity.
The hon. Member for Kingston and Surbiton (James Berry) raised the case of an independent financial adviser. Does my hon. Friend share my concern that independent financial advisers, many of whom were also investors in the fund, risk continuing to be blamed for losses relating to it because of the FCA’s continuing failure to investigate within a reasonable timescale?
I agree with my hon. and learned Friend. The system regulated by the FCA, which the Chancellor wants people to rely on, continues to fail to provide all these investors with compensation, or even an explanation, for their loss.
Mr Devon and many others have been, and are being, misled. Even if an ordinary investor approaches the UK’s financial services sector through an independent financial adviser and asks for a secure, low-risk investment, their money can disappear, and their financial plans and their life can be turned upside down, while agencies that cost millions of pounds to run fail to deliver.
Mr Devon’s investment was in an unregulated collective investment scheme. That might sound highly technical, but it may not be so complicated. In workplaces all across the country, one or two people voluntarily run savings groups, or ménages, where colleagues regularly save money and take turns to receive a lump sum. Depending on the size of the workplace, the sums involved can be significant. That is such a simple operation that the phrase “couldn’t run a ménage” is a common description for someone who is a serial failure at even basic tasks.
Surely, in relation to the Connaught fund, a group such as Capita must be able to do a better job of running a collective financial operation than workmates who have run workplace ménages for years. On the contrary, Connaught became a warning that when players in the UK financial services sector go rogue, the systems for regulation, enforcement and restitution fail to protect our investors. When problems with Connaught emerged, Capita turned tail and ran. It has been allowed to continue evading its responsibility to investors through years of regulatory inertia and confusion.
The financial services sector in the UK has run foul of the law and lost millions—indeed, billions—of pounds too many times. The phrase “couldn't run a ménage” seems an apt description of too many of the organisations and individuals who provide the sector with its leadership. Just like the regulators that oversaw the crash of 2008, the FCA, Financial Ombudsman Service and the Financial Services Compensation Scheme seem to be part of the problem, rather than part of the solution. Even fighting a case all the way through the system may well leave an investor significantly out of pocket. This is definitely a system that does not do what it says on the tin.
I was not shocked to find that the Treasury grabs the regulatory fines, but should they really be grabbed from an industry where the cost of regulation, enforcement and compensation are borne by those in the industry and its customers? We need to look seriously at how we provide more effective regulation, enforcement and compensation, and we should also review the levies and fines. One of the gaps could be filled by giving the FOS a role in enforcing payment of compensation, removing the need for an additional set of fees and ensuring more consistency in investors’ ability to secure the compensation awarded. I have particular concerns about the operation of professional indemnity insurance in the IFA sector. When insurers exempt schemes known to be causing concerns, that undermines the reality of IFA protection and causes significant problems for them. The FCA needs to look at making significant changes to the insurance rules. It could perhaps examine the operation of the Scottish solicitors’ “master policy” and the highly successful Association of British Travel Agents and ATOL—air travel organisers’ licence—industry-wide indemnity schemes.
I want to conclude by commenting on the relationship between the Government and the FCA. It is interesting that in the week before this debate the FCA announced the appointment of a new chief executive, Andrew Bailey. It is widely reported that Mr Bailey was hand-picked for the post from the Bank of England by the Chancellor of the Exchequer. I find this surprising in the light of an exchange I had with the Economic Secretary during a recent debate on the Connaught fund. When I queried the fact that neither the Chancellor nor any other Treasury Minister held a single bilateral meeting with the FCA over a two-year period, she did not contradict me, and I have heard nothing to suggest that it is incorrect. I understand that the absence of such meetings may be intended to give an appearance that the FCA acts as an independent agency, but if the chief executive is hand-picked by the Chancellor, having not even applied for the post, what does that say about the FCA’s independence? Of course there is regular correspondence and interaction between the Government and the FCA, so during a time of such pressure on the financial services sector, why was there not a single bilateral ministerial engagement with the FCA over such a long period? The absence of such meetings perhaps has more to do with protecting Ministers than protecting the independence of a body whose principal officers are headhunted at the Chancellor’s bidding.
As someone steeped in the issues of banking governance and the recovery of the banking sector from the low points of recent years, Mr Bailey could demonstrate his independence very easily by signalling his desire to have the FCA reinstate the inquiry into banking culture. Failure to do so may be interpreted as the inquiry having been ditched to clear the way for him taking up his post. If that is the case, his tenure will not get off to a positive start, and questions over the independence and integrity of the FCA will continue to grow.
It is a pleasure to follow the hon. Member for East Renfrewshire (Kirsten Oswald) and to learn the phrase, “Couldn’t run a ménage”, which I hope will replace, “Couldn’t run a whelk stall”. I have always thought that was probably rather difficult anyway, so “ménage” is a better term.
I congratulate my hon. Friend the Member for Aberconwy (Guto Bebb) on bringing forward this debate and on his amazing achievement in getting some redress of grievance not only for his own constituents but for many of our constituents, mine included. The Hong Kong and Shanghai Banking Corporation behaved quite disgracefully towards one of my constituents. It sold an interest rate swap that was larger than the loan outstanding—it was a condition of the loan taken out —and then, when interest rates fell, it revalued the loan to say that his loaned value was beneath the required level. It therefore put him in special measures and started to impose penal interest rates, and then when I got in touch, it said that under data protection it could not talk to me. The whole story was really quite disgraceful and not what one would expect of a major banking corporation. We are all very grateful for what has been done to get some redress for this.
I must refer to my declaration of interests. I am regulated by the FCA and have been for many years. I was regulated by its predecessor body, the FSA, and before that, going back to the mid-1990s, by IMRO—the Investment Management Regulatory Organisation. I do not think I have Stockholm syndrome, but I have to tell the House that I cannot support my hon. Friend’s motion. That is not because I do not think there have been errors of regulation—there have. We know only too well that the tripartite system of regulation prior to the crash in 2008 was a failure—nobody knew precisely who was in charge of what aspect of regulation and how it was to be managed, and in the end nobody was doing it at all. The FCA, however, was only introduced in 2013 and a lot of the problems to which hon. Members have referred predate its creation. This House legislated in the previous Session to try to deal with the problem, so this motion has been tabled much too early, because the FCA has not had the chance to prove that it is different from the FSA. The FSA undoubtedly failed, which is why this House abolished it.
I appreciate the points my hon. Friend is making—they are entirely reasonable—but I think that the difference between the FSA and FCA is being over-emphasised. The people who were FSA officers when the all-party group on interest rate swap mis-selling was established were the same people as the FCA officers who attended our first meeting after the FCA was established. I think that the degree of change is being overstated.
I do not agree with my hon. Friend on this occasion. Inevitably, some employees remained the same. It would have been extraordinary if all the regulators at the FSA had been fired and sent off to the great regulatory house in the sky. The powers and the responsibilities of the FCA were changed and, indeed, it has carried out an investigation.
The FCA has to be judicious and bear in mind that some people took out swaps knowing full well what they were doing. Not every swap that was sold was mis-sold. Interest rate swaps are a very important safeguard for people who are uncertain of the direction of interest rates. Indeed, with interest rates at their current lows, many people may feel that it is prudent to protect themselves by taking out an interest rate swap. It would be wrong to so overtighten regulation or to be so sensitive to what happened in the past to make beneficial financial instruments unavailable because of historical mis-selling. Each case needs to be looked at on its merits.
When I first took out a mortgage, I did so at a fixed rate because I knew I could afford to pay that rate but was uncertain about whether I could pay a higher rate. That is a prudent and sensible thing for people to do when engaging with the financial sector. The FCA had a big job of work to do in a quasi-judicial role. It could not just arbitrarily decide that all cases were mis-sellings and therefore they all had to be compensated for.
This House, too, needs to be judicious. The motion is really serious. It says that we have no confidence in an arm’s length independent regulator that this House established just three years ago. If we really mean that, we ought to be legislating to create a new one. We should not simply pass a motion; we should say that the body has failed, that it will be abolished as of 1 April and that a new one will be created.
This motion represents an intermediate step whereby the House faces one of two risks. One is that it is passed this evening and, like many other Backbench Business motions, absolutely nothing follows from it. This House would then look foolish. It would look as if whatever we say makes no difference and we would have no future power to bring our authority to bear on independent regulators when things may be more serious.
The other risk is that the chairman of the FCA feels that he has to resign and take responsibility, because there is no chief executive of the moment, which makes this a very strange time to be holding this debate. If the chairman falls on his sword, what would we achieve? One person would go, but the organisation would remain intact because we have not legislated to replace it.
This House should be proud of its constitutional standing and recognise the extraordinary power it has. We can summon people to the Bar of the House if we are sufficiently annoyed with the way they conduct themselves. We can make them answer to Select Committees, and indeed we do. However, if we use that power without due consideration, without being certain and without having every fact at our fingertips that this body, not its predecessors, is the one in which we have no confidence, we undermine the standing of the House of Commons and its ability to do that in future when our case may be better founded.
My hon. Friend is making a typically powerful speech and I agree with much of his argument, but does he not accept that we are here primarily to represent our constituents and that the reason so many Members are upset with the FCA is that it is not giving redress? The time it is taking is so frustrating and the motion puts pressure on it to provide redress.
I am grateful to my hon. Friend for that intervention, because I think there is a difficulty with time. Reference has been made to the HBOS report, which took a long time to come forward. Again, it started under the FSA, and the failures were of the FSA, not of the FCA. For a body that has been going for only three years, such a timespan is perhaps not that unreasonable, given that for two of those years it was making a specific investigation.
We have made huge progress, thanks to my hon. Friend the Member for Aberconwy, in achieving redress of grievance. That is enormously important, and it is right to do that. However, a vote of no confidence is the nuclear weapon of Parliament. It is something that brings Governments down. If we pass the motion, it ought to lead to fundamental change at the FCA and resignations, but I fear that we are trying to fire this gun before we have loaded it with gunpowder, and that therefore it will misfire. In that respect, I hope that my hon. Friend will withdraw the motion, because I think it has had its effect through the debate.
Order. I am sorry to say that we are now going down to five minutes, because of interventions. I call George Kerevan.
In that case, we can still have six minutes. I call Michelle Thomson.
Thank you, Mr Hoyle. I add my thanks to the hon. Member for Aberconwy (Guto Bebb) for the work that he has done through the all-party parliamentary group and more widely. People whom I knew in a previous life before I came to this place are very appreciative of that work. I will address my remarks primarily to the fact that the FCA process of redress simply does not work for businesses that are forced into insolvency as a result of being mis-sold interest rate hedging products. The concept of hedging is well understood to mitigate risk, but those products were structured to be a “heads I win, tails you lose” for the banks.
As many in the Chamber will be aware, mis-selling has caused many unnecessary insolvencies across the country, with simply devastating consequences for individuals and their families. Many companies are in administration, some have had all their assets sold and some have been liquidated, often with the banks still pursuing the directors for personal guarantees and their family homes. In England and Wales, the process under unregulated Law of Property Act receivership is similar, and many people have been made personally bankrupt as a direct result of the mis-selling. The situation should not have occurred in the first place.
Unfortunately, the review process instigated by the FCA is of little use to the individuals—our constituents—who lost their businesses, their homes and their life’s work to the scandal. The first issue is that the process fundamentally does not address, or provide a solution for, insolvent businesses that have suffered from bank misconduct. The former Business Secretary stated in May 2013, after the FCA scheme had been launched, that there were
“unresolved issues surrounding the mis-selling scandal, including how businesses have been forced to close because of the products the banks sold in the first place.
This includes deciphering who will be able to help the businesses in administration, when their assets have been taken away from them, and who will be in charge of finding a solution for them.”
It is clear from that statement that that was an acknowledged fatal flaw in the FCA review system from its inception. Where a business is forced into insolvency, the business owner loses control over the process. Even if the insolvency practitioner decides to pursue a claim against the bank, the redress goes to the bank. One quite simply could not make it up.
The second issue is how the redress process was administered. There has been a distinct lack of transparency about the details of the deals between banks and the FCA, and how the deals varied from bank to bank. How can fairness be guaranteed or trusted when different rules apply to different banks, none of which is transparent, and where gagging orders are commonplace? How can fair treatment be ensured for the 3,000 SMEs that won compensation from the banking review but received no benefit because they were already out of business?
As it stands, the FCA review allows the banks successfully to sidestep all responsibility for their actions, manipulating the system and using the process of insolvency to disregard the principle of the review. Rather than business people receiving redress for their loss, the banks can quite happily admit that they have mis-sold a product and pay the redress to insolvency practitioners. Insolvency practitioners do not have the tools to deal with the scenario. Their primary duty is to the creditors, which results in the lion’s share of the redress going back to the bank. Directors, shareholders and unsecured creditors, including HMRC and local councils, bear the brunt of the pain. It is a paper exercise in which the only benefactors are the insolvency practitioners, who make a tidy sum in fees, and the bank, which is essentially allowed to pay itself back for its own misconduct.
Some, such as the banks and the FCA, may argue that the businesses would have been insolvent anyway. I am sure that that is true for some of them, but, as we know, cash flow is the lifeblood of any business. Sustained, extensive pressure to make high interest payments over several years is, without doubt, a major—indeed, often the sole—contributory factor in a business’s success or failure. To dismiss it as otherwise is not only misleading, but insulting to the thousands of business owners who have lost their life’s work to this scandal. Despite constant calls for engagement and dialogue, business owners who have lost everything are systematically ignored. It is important to acknowledge at this point that, fundamentally, this is not just about regulation or governance, but actually about people. The banks have admitted mis-selling and the business people have been exonerated, but those people still find themselves in a position of powerlessness and total frustration.
There are still difficulties. HMRC now treats owners differently, as they know that consequential losses are not paid out. These systemic issues need to be addressed. Those who have lost so much are often left with nothing more than the energy, drive and determination to fight this tooth and nail. Unfortunately, neither the regulator nor the law gives them the tools or even the voice to fight. On the contrary, their voices are stifled and their pleas for help are ignored. Would it not be more constructive to give them a fair deal in terms of compensation and recovery, so that the business people who have lost everything can use their energy and drive to rebuild their businesses, thereby doing their bit to contribute to our overall economic recovery? To do that, they need our support—the support of lawmakers and regulators—because the banks are not, simply on their own initiative, doing the right thing. With its decision to drop the inquiry into banking culture, the FCA is not doing the right thing either.
The third issue concerns the ability of individuals to take action; only private individuals can take such action. Although a bank may have breached its regulatory duties under the FCA regulations, it can be sued only for breach of contract, not for regulatory breaches—
I add my congratulations to my hon. Friend the Member for Aberconwy (Guto Bebb). He is a doughty fighter for financial justice not only for his constituents, but for all our constituents, and we owe him a great debt.
Like my hon. Friend the Member for North East Somerset (Mr Rees-Mogg), I wish to declare an interest in that I am the director of a small business regulated by the Financial Conduct Authority. Like him, I was also regulated by the Financial Services Authority, but unlike him, I do not go back as far as IMRO. I will come on to some of his points. Whereas most Members have focused on constituents’ cases, he, uniquely, has pushed the debate wider—to the overall role of the FCA. If I have the time, I will come on to that.
I, too, want to mention my constituents’ cases. The first case is that of Terence and Jean Gray of Holbrook in South Suffolk. They lost the £50,000 they invested in Connaught income fund series 3 plus the interest, as well as the interest on a further £50,000 in Connaught income fund series 1. Mr and Mrs Gray, who are now in their 70s, saved that money throughout their lives and planned to live off it following their retirement, but they fear they will never see the money again. Their primary concern is that the FCA is unable to provide a timeframe for when its investigations will be concluded. Several hon. Members have made that point, and I hope that the Minister, who I presume will speak soon, can give us an update on the timescale they face.
I have received correspondence not just from consumers, but from firms. In particular, I have heard from Steven Farrall of Chattisham in my constituency, who owns the Ipswich-based firm Williams Farrall Woodward, a financial planning and portfolio management business. His concern is about the retail distribution review and the new way in which we regulate commission and fee-charging on investments, although I do not want to go into the detail of it. He encapsulates the anger felt by many smaller businesses about the regulator. He specifically blames those rules for the loss of about 13,500 independent financial advisers. He says:
“My own opinion of the RDR is that at heart it is an assault on the property and employment rights of thousands of law abiding tax paying private citizens, effectively the employers of the FCA bureaucrats… It is an absolute disgrace in a free democratic society the bunch of self regarding and utterly unaccountable functionaries should have such power.”
That is perhaps a tad harsh, but it brings me to my own experience.
I started a mortgage brokerage in 2004. Of course, that did not come under the FCA, but my experience was that the FSA was always box-ticking, rather than looking at potential problems and doing something about them. I could give many examples of that. Every six months, we had to submit something called a capital adequacy return, despite being a relatively small business. We had a famous document called MCOB—the mortgage conduct of business rules—which was the size of a doorstep, and none of which made sense to anybody. I think it is the assumption of the regulator that small practitioners have armies of compliance officers, just like the banks. Of course, nothing could be further from the truth.
The most extreme example of the FSA being focused on bureaucracy, rather than dealing with the problems in the industry, came in 2010 at the height of the euro crisis, when many people doubted from day to day whether it would survive. On a day when the euro’s survival was the top item on the news, I received an email for the directors of regulated firms. I opened it, expecting advice about the possible calamity we faced, only to find that it was a diversity survey. It was an extraordinary diversity survey that wanted to know, across all levels of management in my business, which was a very small business employing a handful of people, not only what percentage of staff were from each ethnicity, but what percentage were transsexual and even intersexual—a word I had never even heard before. The regulator, on that day of financial crisis, wanted to know how many of my staff were intersexual. A bit like the word poppers, I suspect that word will be new to many people—possibly even to people who are in the Chamber today.
I use that example to illustrate how the FSA was a tick-box regulator. That is why, despite all its work, it never noticed the basic thing, which was that our financial system was heading for an almighty crash and crisis. What we can say in favour of the FCA is that we have not had a credit crunch under it. We have had the successes that my hon. Friend the Member for Wyre Forest (Mark Garnier) talked about. There is one in particular that I will finish on.
What the FCA has done on mortgage rules and on the property market has been for the good. We need prudential borrowing. I am a conservative on financial services and think that we were far too reckless in the build-up to the crunch. If we want fairness, we must recognise that asking first-time buyers to be so heavily regulated, while a buy-to-let applicant for a mortgage faces no regulation and can take out an interest-only mortgage for a huge amount of money, without a key facts illustration that has to be advised, regulated and so on, is deeply unfair.
In conclusion, I agree with my hon. Friend the Member for North East Somerset that it is too early to pass judgment on the substantive work of the FCA, but we all feel that it needs to do greater work on the basic injustices that our constituents face in cases such as Connaught. I hope that the Minister will have some news on when people who have been affected by such cases can expect to hear substantive news about their rights.
I add my congratulations to the hon. Member for Aberconwy (Guto Bebb) on securing this debate. He has been careful in raising the excesses that his constituents have suffered from over the past couple of years. He is to be commended for the wide range of issues he raised in his speech, including interest rate swaps, which many Members have talked about; Connaught, which has affected many people in our constituencies; and, of course, the issue of banking culture, which in many ways sparked the debate that we are having.
The hon. Member for Bassetlaw (John Mann) made a wide-ranging speech in which he talked about entrepreneurialism and the importance of consumer protection. Again, he is to be commended for his speech.
The hon. Member for Wyre Forest (Mark Garnier) gave an interesting speech on the FCA and its duties. He also got on to the subject of football, which has been much discussed this evening. I cannot pass up the first opportunity I have had in this House to speak about the semi-finals of the league cup in Scotland this week. I am glad to say that the mighty Hibernian football club—the team that the term “sexy football” was meant for—managed to get through to the final in Glasgow on 13 March. As the Member of Parliament for Ross, Skye and Lochaber, that gives me a small problem, because the team Hibernian will face is Ross County—the small highland team from Dingwall that has done very well in the premier league over the past few years. In some respects I’ll be a winner if Hibs win, but I’ll still be a winner in the constituency if Ross County win.
My hon. Friend the Member for Motherwell and Wishaw (Marion Fellows) raised a number of important points about the complexities of financial regulation, and the difficulties faced by people in her constituency—indeed, in all our constituencies—in understanding how consumer protection should work under the FCA. We should pay much regard to that.
The hon. Member for North Warwickshire (Craig Tracey) made a good contribution about his personal experiences of running a business, and a number of Members expressed their frustration with the complexities of regulation that affect many small businesses. The hon. Member for Ceredigion (Mr Williams) spoke about banking culture and his continued lack of trust in the FCA. We should take that seriously, as should the FCA, because many people clearly feel that it is not discharging its obligations effectively. The hon. Member for South West Devon (Mr Streeter) spoke about swaps—again that issue is important to many people, and there is a lack of confidence in the FCA.
I will not go through every Member’s speech because the themes were the same. The hon. Member for Hazel Grove (William Wragg) mentioned RBS, and in particular GRG. It is important to reflect on the fact that RBS was state-owned. I know that the Government cannot interfere in the operations of RBS, but is it not a disgrace that at a time when we as taxpayers owned that institution, it behaved as it did to many companies?
It was a pleasure to listen to my old friend the Member for North East Somerset (Mr Rees-Mogg). At one time, I was connected to him—indeed, he was a client of mine—and in the past I have also been regulated by IMRO, the FSA and the FCA. Having announced that he has been regulated, I cannot help but reflect that some of his colleagues might prefer it if he were more regulated in this Chamber, but that is another matter.
Some important points were raised by my hon. Friend the Member for Edinburgh West (Michelle Thomson) about redress for companies that have been pushed into insolvency, and we finished with the 13th and last speaker, the hon. Member for South Suffolk (James Cartlidge), who in some respects made the most important comments of the evening about the fact that the regulator and the Bank of England were asleep at the wheel when we had the financial crisis in 2007-08—the “almighty crash and crisis”, as he put it. It is worth reflecting on that, because the House should ensure that we have the architecture that stops us ever revisiting the kind of things that we faced in 2007-08. That, along with consumer protection, is the fundamental point. There should be no room for complacency or hesitation when it comes to reforming the City, and the FCA must reinstate its long-awaited inquiry into banking culture.
Bang on time for this debate, a story is emerging today of a fine for a British bank, this time in North America. Barclays has been fined £70 million by US regulators for its US dark pool trading operations. Dark pool operations allow investors to trade large blocks of shares but keep the prices private. Barclays has admitted misleading investors and violating security law in the way that it operated the pool. The New York Attorney General and the Securities and Exchange Commission have both censured the bank for its misconduct. Ralph Silva, a banking analyst from Silva Research Network, told BBC News:
“The fines are a message, not a punishment. The levels are insignificant compared to the profits in this line of business… Regulators are telling the banks to close the vulnerabilities, something the banks have been reluctant to do because answers come with high operational price tags.”
That is a clear expression that the banks are still not getting it. Unacceptable behaviour is continuing, and we are probably not hearing the full scale of the malpractices that are going on. That is why the decision not to proceed with the review into banking culture is so wrong, and sends completely the wrong signal. I am concerned that the FCA’s move to forsake the critical review into behaviour, pay and culture surrounding the UK’s banking sector will have a detrimental impact on levels of consumer trust. The FCA must reinstate its long-awaited inquiry into banking culture.
We repeatedly hear legitimate concerns about the amount of time that it is taking for the Chilcot inquiry into the Iraq war, but we have not had a fundamental review into the banking crisis and behaviour. We ought to remember the devastating impact of the financial crisis. Dealing with the cultural issues that were at the heart of it, and which in some senses still remain, is crucial. That is why the removal of the banking culture review is wrong, and we have to seriously question the judgment and leadership of the FCA in not pursuing it.
Much is said about the change to the Basel rules and the enhancement of capital ratios of the banks. It would be my contention that we need not just to review culture in a vacuum, but to do further analysis and stress-testing critically to examine what kind of leverage is appropriate to ensure that, in any financial crisis and any kind of significant fall in asset values, we as a country are never exposed again to banking failure. It is in that context that banking culture must be seen. We are still in a situation where there is a perception that, in any kind of banking failure the state will still intervene. It means that for the bankers the upside potential is all for them and the downside protection is all for us. There needs to be an alignment with society’s interests and that of the banks. We still have too much of a fixation with property assets and not enough with real assets, which can enhance our ability to deliver sustainable economic growth. These are all matters related to banking culture.
I have concerns that the FCA’s move to forsake the critical review into behaviour, pay and culture surrounding the UK’s banking sector will have a detrimental effect on consumer trust. Restoring consumer confidence in banking integrity is imperative in the aftermath of the financial crisis, where we saw consumer confidence drop. Statistics show some of the bad practices used before the 2008 crash are again being adopted in the banking sector. A recent study by the banking staff trade union Affinity surveyed staff at Lloyds Banking Group and TSB. It revealed that 55% believe that the banks are reverting to their old sales management techniques; 63% stated that the bank was more interested in the results they got and the objectives than in how they do our jobs; and 53% believe that the performance of TSB was just about sales. That is the view of the staff of those banks. Those statistics should be very worrying for all of us. They demonstrate the need for a robust review into banking culture.
A study conducted by KPMG showed that, between 2011 and 2014, Britain’s banks handed over 60% of their profits in fines and customer remediation, for a total of £38.7 billion. Those figures suggest that there should be no room for complacency or hesitation when it comes to reforming the City. Only in the past few days, a landmark legal pursuit has contested the banks’ £2 billion compensation scheme for inappropriate interest rate swaps. The hearing could have consequences for over 10,000 small and medium-sized enterprises that found themselves in the midst of the mis-selling scandal.
The appointment of Andrew Bailey as chief executive of the FCA raises legitimate questions about the FCA’s independence from the PRA and its dedication to consumer protection. Bailey must be subject to a full and proper confirmation hearing. Prior to his appointment with the FCA, Bailey was the deputy governor for Prudential Regulation and chief executive officer of the Prudential Regulation Authority, supervised by the Bank of England. As a conduct regulator, the FCA’s role is to protect consumers. Bailey’s appointment therefore raises questions about the FCA’s independence from the Prudential Regulatory Authority and its dedication to holding consumer protection at the heart of its aims and values.
In a speech to the Mansion House in June 2015, the Chancellor launched a “new settlement” with the banks, which was widely interpreted as a move away from the tougher measures put in place for the banks under Wheatley’s leadership. The Chancellor has suppressed the reverse burden of proof and slashed the bank levy. The developments lead to questions as to whether the FCA is on the wrong side of the Chancellor’s “new settlement”. The new chief executive of the FCA must be subject to a confirmation hearing, so his plans and views can be scrutinised in detail.
I am concerned that the FCA’s move to forsake the critical review into behaviour, pay and culture surrounding the UK banking sector will have a detrimental impact on consumer trust. The FCA must reinstate its long-awaited inquiry into banking culture. The appointment of Andrew Bailey as chief executive of the FCA raises legitimate questions about the independence of the FCA that must be addressed. Bailey must be subject to a full and proper confirmation hearing.
I congratulate the hon. Member for Aberconwy (Guto Bebb), my hon. Friend the Member for Bassetlaw (John Mann) and the hon. Member for East Renfrewshire (Kirsten Oswald) on securing such an important and topical debate, and I thank them for their excellent contributions. It is also a delight to debate opposite the Minister for the first time.
We have had some fantastic contributions from hon. Members. Transparency seems to be the key theme running through the debate. Members referred numerous times to Connaught and interest rate hedging products, and we heard some interesting case studies from the hon. Member for North Warwickshire (Craig Tracey), who shared his experiences of running his own insurance firm and how regulation affected his business. The hon. Member for Wyre Forest (Mark Garnier) highlighted the positive things the FSA was doing—for example, in supporting innovation in “fintechs”—and said that, although there were failings that needed to be addressed, it was important not to throw the baby out with the bathwater.
Operators in the finance sector, commentators, hon. Members and Members of the other place have recently expressed concern over the FSA’s ability to carry out its operational objectives—consumer protection, integrity and competition. Sadly, these concerns overshadow some of the fantastic work the FSA has carried out to date in the finance sector.
Many argue that the Chancellor’s Mansion House speech last year sent a clear message to the financial services sector that the UK was returning to business as usual. In outlining his new settlement for the finance industry, he stated that we must become
“the best place for European and global Bank HQs”.
That was widely interpreted by many in the finance industry to mean that there would be a softening of the FSA’s approach to banks. In fact, as an ode to the Prime Minister’s “hug a hoodie” period, which still tickles me when I think about it, I would suggest that many felt the Chancellor was entering his own love-in—the “hug a banker” period.
The bankers’ Chancellor had finally got his mojo back, and what a mojo it was! A string of concessions was handed to the banks: changes to the bank levy that significantly benefited large international banks; watered-down proposals for implementing the ring fence between retail and investment banking; a time limit on claims relating to the mis-selling of payment protection insurance; and confirmation that banks would not be asked to hold significantly more capital.
In January, however, in a complete U-turn from the autumn statement and the “never had it so good” euphoria, the Chancellor warned us of the risks to the UK from the shaky global economy, citing a
“dangerous cocktail of new threats”
and highlighting the dangers of “creeping complacency”. He failed, however, to address his creeping return to business as usual in our finance sector and the FSA’s role in dealing with the same.
Several factors have brought us here. The first is the feeling that the FSA’s independence has been compromised and that its agenda is being set by political pressure from the Government. Such independence was called into question by a recent external review that said the FSA board’s powers
“with respect to making independent decisions”
were limited and that external interventions
“can have dramatic effects on the organisation”.
This coincided with stories in the media that the Bank of England was directly involved in the highly criticised decision by the FSA to axe the review into the culture at some of the UK’s biggest banks.
Then there is the Chancellor’s influence over sacking or appointing chief executives to the FSA. [Hon. Members: “FCA!”] I mean the FCA. Martin Wheatley, who had been hired by the Chancellor as a tough guy, and a key figure in pursuing misconduct in the financial sector, was removed and replaced by Andrew Bailey. Many are concerned that the Chancellor’s new appointment, who is seen as more of a pragmatist, heralds a decisive shift towards greater leniency on the banking system.
I have no doubt that the new appointment seeks to be completely impervious to the Chancellor’s charms, but as one Treasury Select Committee member eloquently stated recently,
“there is a subliminal desire if you like, to please the masters by taking some of these decisions where the inference has been that potentially if you do not play ball you will lose your job.”
I turn now to transparency. I seek to highlight to the Minister a few examples of where achieving transparency has been a struggle. The conclusion of the FCA’s work on HSBC’s Swiss bank tax evasion and the decision not to take action led many FCA critics to ponder whether this had come as music to HSBC’s ears, given the bizarre coincidence that at the same it was considering whether it should relocate its headquarters outside London. Little detail was provided regarding the rationale for this decision and the FCA simply stated that such a major tax investigation was a matter for HMRC.
That highlighted two issues—transparency and the sharpness of the FCA’s teeth as a regulator. Those issues aside, I would welcome the Minister’s assurance that a thorough investigation will be carried out as a matter of urgency, that HSBC will pay the appropriate tax to the Treasury and that we will not see a repeat performance of last week’s Google tax debacle. Perhaps the incident will encourage the Minister to consider a U-turn on the Government’s proposed cuts to HMRC. If the FCA has no teeth in such situations, surely the Government must ensure that HMRC is adequately resourced—but I digress.
On the same theme of a lack of transparency, I must refer to the industry scandal surrounding the mis-selling of interest rate hedging products, as outlined by my hon. Friend the Member for Bassetlaw today. The FCA rightly launched a full review, resulting in the publishing of a set of rules. What remains worrying is that the FCA had to be pushed by the Treasury Select Committee to publish the rules at all; and, even now, we await details of the methodology agreed with each bank so that we can be satisfied that all banks are in fact complying.
Similar calls for more FCA transparency surrounded the review of the collapsed Connaught Income Funds, as highlighted by the hon. Member for Aberconwy. Here, the FCA faced criticism from the Under-Secretary of State for Wales, the hon. Member for Vale of Glamorgan (Alun Cairns), who set up the all-party parliamentary group on the Connaught Income Fund, and who cited a “generally defensive approach” from the FCA and lack of “transparency”.
Then there is the highly criticised scrapping of the review into banking culture. The Treasury Select Committee recently found that there was no FCA board consultation on this issue. Even the Chairman was not privy to the decision. It is also important to note that no public statement was made regarding the decision—it was simply leaked. When pushed, the FCA commented that
“we decided that a traditional thematic review would not help us achieve our desired outcomes and we would therefore take forward our work on culture through other routes.”
That hardly explains the position at all, but essentially these “other routes” refer to “self- regulation” underpinned by the FCA’s new conduct rules, which centre largely on a presumption that those at the top simply do all that is “reasonable” to ensure good governance.
As we heard in the earlier debate on the Bank of England and Financial Services Bill, the removal of a reverse burden of proof further diminishes any legal recourse that could be pursued. The Chair of the Treasury Select Committee has himself warned that much of the responsibility for implementation is left to banks. He stated that
“the spirit is willing at the top, but the flesh is weak…The board may will the change and culture, but not enough happens lower down.”
Now the FCA’s new direction on this issue deserves close examination, but unfortunately we do not have the time to debate this today. The point is that such a radical step change away from what the public believed would be a root-and-branch banking culture review should arguably not have happened without—at the very least—board approval and transparent consultation.
In conclusion, although I applaud much of the FCA’s work and many of its achievements to date, the issues raised today ring some very loud alarm bells. I hope that the Minister realises that the British public are still paying the price for a financial crisis that they did not cause and that they require an FCA that truly holds the banking system to account—an FCA that ensures that financial productivity does not come with an immoral price tag that ignores the principles of fairness and fair play on which British society is built.
I look forward to hearing the Minister’s comments, and I hope she will confirm that my concerns will be addressed—otherwise, I am afraid that the so-called bankers’ Chancellor will be letting down the British public who bailed the banks out and sending out a clear signal of a return to “business as usual”.
Order. Before the Minister speaks, let me make it clear that I intend to call the hon. Member for Aberconwy (Guto Bebb) at no later than 9.58.
I am left with very little time to cover such a wide-ranging debate. I congratulate the Backbench Business Committee and my hon. Friend the Member for Aberconwy (Guto Bebb) on securing this debate.
I think we can all agree that it is important that in the Financial Conduct Authority we have an organisation to keep financial markets honest for our constituents and for markets, which play a crucial role in our economy. We all want financial services to be on the side of our constituents—the people who want to work hard, do the right thing and get on in life. It is therefore vital that financial services display and uphold the highest standards of behaviour and treat their customers fairly.
The House will no doubt be aware that most small business lending is not regulated. Obviously, when an independent regulator is involved, we need to ensure that the right people are doing the job. Last week the Chancellor announced a number of new appointments to the FCA board, including an excellent new chief executive. As the Chancellor said, Andrew Bailey was the outstanding candidate to be the next chief executive. He brings with him a wealth of experience of financial services regulation in the United Kingdom. He is simply the most respected, most experienced and most qualified person in the world to do the job. However, I want to put on record the Government’s gratitude to Tracey McDermott, the acting chief executive, for all her hard work over the past four months.
Last week we also appointed four new non-executive directors: Bradley Fried, Baroness Hogg, Ruth Kelly and Tom Wright. The new directors provide a balanced mix, on the gender front and in terms of their public and private sector experience and their experience of politics, as well as a wealth of knowledge of consumer issues and the financial services sector more generally, adding an invaluable independent challenge to the board. We believe that the new appointments will strengthen the organisation, and, by ensuring that it has the best possible leadership, will help the FCA to remain a strong, tough regulator that protects consumers and ensures that financial markets work for the benefit of the whole economy.
There are clearly still challenges ahead for the FCA, but it is worth remembering the positive steps that it has already taken. It is in the process of implementing the new senior managers and certification regime, which includes applying enforceable conduct rules to anyone who is involved in the financial services activity of a bank. It has introduced improved whistleblowing requirements, and a new remuneration code that will ensure that individuals are not rewarded for taking excessive risks. It has taken action to protect consumers, such as the regulation of consumer credit, which has included capping the cost of payday lending to protect consumers from unfair costs.
FCA regulation is already having a dramatic impact on the payday market. Indeed, the FCA found that the volume of payday loans had fallen by 35% in the first six months since it took over regulation in April 2014. There has been a new focus on competition in banking and other markets, such as excellent work on Fintech and the innovation hub. Last year the Treasury and the FCA jointly launched a financial advice market review, which is designed to make financial help more accessible and affordable for all our constituents. It is also worth highlighting the role of the Financial Ombudsman Service, to which Members may wish to refer their constituents when they have problems with financial services firms.
The Government are as keen as those who are present tonight to resolve the matters that have been raised by a range of Members. We heard from not only my hon. Friend the Member for Aberconwy, but from the hon. Member for Bassetlaw (John Mann), my hon. Friend the Member for Wyre Forest (Mark Garnier), the hon. Member for Motherwell and Wishaw (Marion Fellows), my hon. Friend the Member for North Warwickshire (Craig Tracey), the hon. Member for Ceredigion (Mr Williams), my hon. Friend the Member for South West Devon (Mr Streeter), the hon. Member for Brentford and Isleworth (Ruth Cadbury), my hon. Friend the Member for Hazel Grove (William Wragg), the hon. Member for East Renfrewshire (Kirsten Oswald), my hon. Friend the Member for North East Somerset (Mr Rees-Mogg), the hon. Member for Edinburgh West (Michelle Thomson), my hon. Friend the Member for South Suffolk (James Cartlidge) and the hon. Member for Ross, Skye and Lochaber (Ian Blackford), as well as the hon. Member for Salford and Eccles (Rebecca Long Bailey).
A number of points have been raised, and I shall deal with them in turn. The issue of the banking culture review was raised by the hon. Member for Salford and Eccles, my hon. Friend the Member for Aberconwy, and the hon. Member for Bassetlaw. The first time I personally heard about the FCA’s decision to discontinue the review was when the story broke in the media on new year’s eve. We have made it abundantly clear to the House that no Treasury Minister or official was involved in the FCA’s decision, and the FCA has made it clear that it did not inform the Treasury before the decision was made public.
Will the Minister give way?
I would love to, but I do not have time.
Will my hon. Friend give way?
No, because the hon. Gentleman was not even present for the debate.
The hon. Member for Edinburgh West, my hon. Friend the Member for Aberconwy, the hon. Member for Ceredigion, my hon. Friend the Member for South West Devon and the hon. Member for Brentford and Isleworth also mentioned interest rate hedging products and businesses that were suffering as a result of interest rates that were lower than expected. The Government have made it clear from the beginning that mis-selling of financial products is unacceptable, and that businesses affected by it should be compensated. The FCA has established a redress scheme for small businesses that were mis-sold interest rate hedging products to ensure that eligible businesses are compensated. So far the scheme has paid out on 18,000 cases, and more than £2 billion has been paid in redress, including £464 million to deal with consequential losses.[Official Report, 4 February 2016, Vol. 605, c. 8MC.]
As we have heard tonight, there are still some cases outstanding. As at year end, these include 700 cases in which full refunds have yet to be accepted. Businesses that are considered larger and more sophisticated are not covered by the redress scheme, but they can of course take advantage of the first-class brains in our legal profession. The FCA considers that there is merit in holding a review of how the scheme has worked when these legal cases have been concluded.
The question of Connaught was raised by the hon. Member for Motherwell and Wishaw, my hon. Friend the Member for Aberconwy, the hon. Member for East Renfrewshire and my hon. Friend the Member for South Suffolk. The Government and the FCA understand the serious financial difficulty and distress that this issue has caused to many investors. As hon. Members might be aware, the FCA published an update to investors on its website this week on Connaught Income Fund, series 1. The update highlights that a settlement agreement has been reached between the liquidators of the fund and Capita Financial Managers Ltd. The FCA has asked the liquidators of the fund to distribute the settlement sum to investors as soon as possible. The investigation that the FCA is pursuing will continue independently of the settlement.
The Global Restructuring Group was mentioned by the hon. Member for Edinburgh West and my hon. Friend the Member for Hazel Grove. Let me reassure the House that I expect to see the conclusions of the FCA’s investigation into this matter in the first quarter of the year. On the point made by the hon. Member for Ross, Skye and Lochaber and my hon. Friend the Member for Wyre Forest on Treasury Select Committee scrutiny of FCA appointments, we have agreed that the Committee will be able to carry out a pre-commencement hearing before the new CEO starts at the FCA.
A number of questions have been raised about FCA independence. The FCA is of course operationally independent of the Government. We appoint the chief executive and the board, and the FCA’s objectives and duties were voted into statute during the last Parliament. I firmly believe in the independence of the FCA. It is vital that consumers and firms know that regulatory decisions are being taken in an objective and impartial way. Contrary to what the hon. Member for East Renfrewshire seems to think, I have met the acting chief executive of the FCA and her predecessor from time to time. I regret the fact that the hon. Lady has formed a different impression.
The hon. Member for Salford and Eccles raised the question of operational matters. I am afraid that she cannot have this both ways. If she wants the Treasury to interfere in operational decisions at the FCA, she is asking for something that completely contradicts the spirit of independent regulation that I have supported this evening. No one is denying that the FCA has a tough job ahead. That is why it is essential that it is well prepared, well staffed and well equipped to do that job, and that it has the best leadership possible. I am confident that the FCA has the right mandate and team.
Like my hon. Friend the Member for North East Somerset, I believe that today’s motion is neither well founded nor well timed, given that a new chief executive and a new team are in place. I strongly urge hon. Members to ignore the motion before us tonight.
On behalf of myself, the hon. Member for Bassetlaw (John Mann) and the hon. Member for East Renfrewshire (Kirsten Oswald), I have to say that I think we were rumbled by my hon. Friend the Member for North East Somerset (Mr Rees-Mogg). The purpose of having this debate on the Floor of the House was to highlight the very real concerns of hon. Members from all parties and from all parts of the United Kingdom about the way in which the Financial Conduct Authority is performing its duties in relation to far too many issues. People have real concerns about the interest rate swaps issue, about the way in which the Connaught scheme has been dealt with, and about the decision not to move ahead with the banking review, which was part and parcel of the need to deal with the banking culture. By bringing this debate to the Chamber, we have certainly made it clear that the FCA is living on borrowed time.
My hon. Friend the Member for North East Somerset said that the debate was premature, and he is potentially correct. However, I hope that in any future debates on this subject, he will support taking further action. He talked about the danger of passing a motion that would subsequently be ignored by the Government, and that highlights some real concerns about the way in which we deal with Back-Bench business. The Backbench Business Committee was a big and important development in the last Parliament, and it is a shame that passing a motion might result in this House not being taken seriously in relation to an important motion such as this. The House should reflect on the fact that we heard 13 Back-Bench speeches but only two were mildly supportive of how the FCA is operating. There is an important message in that point: the FCA does need to reform. Although we all hope that the new chief executive will be a fresh brush within the FCA, he should be aware that he has a lot of work to do to rebuild confidence in the regulator, as it—
Motion lapsed (Standing Order No. 9(3)).