Financial Services and Markets Bill

Committee (2nd Day)

Amendment 38

38: After Clause 23, insert the following new Clause— “FCA powers beyond designated activities (1) This section applies to any person (P) conducting or purporting to conduct any financial services and markets activity, including advisory services, whether or not that activity is designated or regulated, provided that P—(a) occupies a position in which they are expected to safeguard, or not to act against, the financial interests of another person (CP), or in which there is significant asymmetry of information,(b) dishonestly abuses that position, and (c) intends, by means of the abuse of that position—(i) to make a gain for P or another, or(ii) to cause loss to another or to expose another to a risk of loss.(2) A person may be regarded as having abused their position even though their conduct consisted of an omission rather than an act.(3) If the conditions set out in subsections (1) and (2) are met, the FCA has the following powers in relation to P—(a) a power to require the supply of information;(b) a power to make investigations (including the making of reports);(c) a power of entry into premises controlled by P;(d) powers of inspection, search and seizure with respect to premises controlled by P;(e) a power to make a private or public statement of censure;(f) a power to impose monetary penalties.(4) The Treasury may by regulations make provision about enforcement in connection with the powers included in subsection (3), and may make such modifications to the provision in subsection (3) as the Treasury considers appropriate.(5) If the conditions set out in subsections (1) and (2) are met, P is liable—(a) to account to CP for any gain P has made directly or indirectly by the transaction, and(b) to indemnify CP for any loss or damage resulting from the transaction.(6) If the FCA is satisfied that the conditions set out in subsections (1) and (2) are met, it may order P to pay to the appropriate person or distribute among the appropriate persons such amount as appears to the FCA to be just, having regard to the profits appearing to the FCA to have accrued to P.(7) The FCA has the power to institute criminal proceedings, including under section 4 of the Fraud Act 2006, provided that the conditions set out in subsections (1) and (2) are satisfied.”

My Lords, the amendments in this group address matters of fraud or misrepresentation that occur around and because of the regulatory perimeter and have been factors in various recent scandals. Amendment 38 establishes a regulatory offence for fraud by abuse of power and reaffirms FCA power to undertake criminal prosecutions for fraud. I thank the noble Lord, Lord Naseby, for his support on that amendment. Amendments 39 and 198 deal with instances where there are forms of deception or inadequate or lack of information that can mislead about regulated status but which are not caught by existing offences.

A central feature in various scandals has been the abuse of a position of power and/or a belief that an entity was regulated and therefore all its activities had some seal of approval. It has later been discovered that there is no regulatory, supervisory or any other cover and no redress via regulators. The list of examples is extensive, and includes Lloyds Bank’s business support unit, HBOS Reading, Blackmore Bond, London Capital & Finance and RBS’s Global Restructuring Group, but there are many more.

Smaller but nevertheless still substantial businesses have been particular targets: bankers taking advantage of business lending being outside the regulatory perimeter, seemingly not covered by the integrity objective or anything else, which I and other noble Lords have laid out in detail and has been covered by the APPG on Fair Business Banking and others.

The FCA explained in excruciating detail how the asset stripping in the GRG case fell outside its objectives and its own created interpretations, and Andrew Bailey, then CEO of the FCA, said that even if the SMCR had been active at the time, it would not have been covered by it. Later, he hedged and said that maybe it would have applied, but it would all depend.

We discussed this issue in the Fraud Act 2006 and Digital Fraud Committee and all members were shocked to discover how unclear the situation was and thought that it ought to be remedied. Amendment 39 addresses this by requiring positive signage that a given activity is not regulated when it is provided by a regulated person. This kind of distinction not only helps clarify where boundaries are but can nudge greater general awareness of those boundaries. I thank the noble Lord, Lord Naseby, for supporting that amendment.

The third amendment in this group creates an offence when any person, whether authorised or not, by their actions or omissions suggests to a reasonable person that their activities in whole or in part are authorised when that it not the case. There is already an offence in FSMA for making out that you are regulated when you are not, but my amendment is broader because it covers omissions, and omissions are where frequently people are misled. This amendment overlaps with the second amendment in this group, Amendment 39, but it also covers unregulated persons. These differences may seem like splitting hairs compared with the existing FSMA provisions, but they are the differences that fraudsters exploit. Some may think that a little implied enhancement of status is no big deal. Unfortunately, it is, and it must be stopped. I beg to move.

My Lords, my noble friend Lady Bowles’ speech was so powerful that I saw a lot of heads nod, but perhaps that has discouraged other noble Lords from standing up to speak on this occasion.

I am not going to attempt to repeat an excellent speech which made the points which such clarity. I just want to underscore two things. Whenever I have conversations with the FCA and whenever you read its articles, it prays in aid the complexity of the regulatory perimeter so that on so many occasions it is hard to know exactly where it is and how it is applied. However, when you look at abusers and scammers, they have absolutely worked out where the regulatory perimeter stands and know exactly what scope they have, and they make sure they use every scrap and every inch of that space which is provided to them. That is addressed by these amendments.

The second issue that I want to underscore was raised by my noble friend. It is that, culturally, the FCA seems to be very timid about pushing to the limit of the perimeter the regulatory powers it already has. It is so because it is very afraid of stepping over the boundary at any point. These amendments provide not only much more clarity but some backbone for the FCA to take a far more positive stance. It is quite shocking to most people that the key financial regulator can be absolutely aware that abuse is taking place, that mis-selling is taking place, but feels that it is unable to do or say anything because there is a regulatory perimeter after which the issue is caveat emptor and those who are defrauded can turn only to the enforcement agencies, which relies on finding a local police force that has the resources and capacity to pick up the issue. We know that with the Lloyds Reading case small businesses that were very badly abused went to police force after police force and were turned down until they went to Thames Valley Police, which had more resources, and the police and crime commissioner, Anthony Stansfield, whom I utterly praise in this issue, decided to take on the case—a very rare instance. They got no help from the National Crime Agency or the Serious Fraud Office because they considered that the fraud that everyone recognised was taking place was too small fry to occupy them. Frankly, it is a shocking situation to be in. Many people have said that this must be remedied. I congratulate my noble friend on bringing forward an amendment that aptly provides that remedy. I very much hope that the Government will take it up.

My Lords, I am impressed by the arguments made by the noble Baronesses, Lady Bowles and Lady Kramer. To me, the fundamental issue seems to be the asymmetry in both power and information between those who have been defrauded and the fraudsters. These amendments are a useful vehicle to try to adjust that asymmetry, at least in part. I look forward to the Minister’s response and hope that she says something positive.

My Lords, tackling fraud requires a unified and co-ordinated response from government, law enforcement and the private sector to better protect the public and businesses from fraud, reduce the impact of fraud on victims and increase the disruption to and prosecution of fraudsters.

As the noble Baroness, Lady Bowles, explained, Amendment 38 targets fraudsters; the Government strongly agree with the spirit of it. However, strong punishments for those carrying out these acts already exist under the Fraud Act; also, the police and the National Crime Agency already have the powers to investigate fraud, with the FCA providing strong support. That is why we are ensuring that the police have appropriate resources to apply the existing powers to identify and bring the most harmful offenders to justice, including through severe penalties for those who target some of the most vulnerable in society. The Home Office is investing £400 million in tackling economic crime over the spending review period, including £100 million dedicated to fraud.

As the noble Baroness noted, although FSMA does not provide the FCA with an express power to prosecute fraud, it is able to prosecute fraud if it furthers its statutory objectives. The FCA continues to pursue firms and individuals involved in fraud; most of this work is against unauthorised activity operating beyond the perimeter, which is where the FCA sees most scam activity occurring. As at the end of September 2022, the FCA had 49 open investigations, with 217 individuals or entities under investigation.

In its 2022 strategy, the FCA outlined and emphasised its broad existing remit in relation to reducing and preventing financial crime, including fraud; it also recognised the important role that it plays in tackling this issue.

I am sorry but can I ask the Minister a specific question? The Blackmore Bond case was a massive abuse in the mini-bonds scandal when 2,000 people lose something like £46 million. Other than dealing with a small entity that was doing some illegal promotion, the FCA declared that it could not act because the case was beyond the regulatory perimeter. I am therefore rather befuddled by the Minister saying that the FCA acts beyond its perimeter when it is associated with its principles; the principle of integrity obviously applies.

In dealing with the noble Baroness’s points, I should perhaps write to her on the particular case to which she refers. However, as I understand it, the FCA has a remit to tackle fraud, for example where unauthorised firms are purporting to undertake authorised activity—a point that we may come on to in our debates on later amendments.

May I just have clarity? The Minister said, “Only where an unregulated firm undertakes an authorised activity”. Blackmore Bond was selling mini-bonds, which was not a regulated activity at that time. Is the Minister explaining to us that the FCA and regulator do not or cannot act in that area and that she is satisfied with that situation?

No, I am saying that I gave an example of where the FCA could take action for activity beyond the regulated perimeter, but I will write to the noble Baroness on the specifics of the Blackmore Bond case as an example of the question that she asked about this interaction and limitation on where the FCA can act.

Further action was taken to avoid a repeat of cases such as Blackmore Bond and London Capital and Finance. In November 2019, the FCA banned the promotion to ordinary retail investors of high-risk speculative illiquid securities, which includes the types of bonds sold by Blackmore and LCF. The Government have also set out our intention to include non-transferable securities, including mini-bonds, within the scope of the prospectus regime. This would mean that issuers of mini-bonds would be required to offer their securities via a platform when making offers over a certain threshold, which would ensure appropriate due diligence and disclosure and be regulated by the FCA, providing stronger protection for investors. However, I know that that does not address the noble Baroness’s particular point, on which I will write.

My Lords, I accept that the Minister is, essentially, responding in the narrow terms of the amendment before us, but she will be aware that our Lordships’ Select Committee looked into the whole issue of financial fraud and crime. The Minister mentioned the FCA, but the committee found that there are so many agencies involved that their collective effort is a total lack of integration and co-ordination, and that thousands of people are left completely unsupported. Less than 1% of police resources are spent on tackling a huge sector. The Government have now stopped publishing statistics in relation to crime that includes financial crime. I wonder why.

I opened my remarks by acknowledging that fraud needs a co-ordinated response from government, law enforcement and the private sector. That is at the heart of our approach, and it is why the Government established the Joint Fraud Taskforce to bring all those actors together. I attended it towards the end of last year, and it meets regularly. There are many different actors that need to take action in this space, including the regulators but also law enforcement, industry and companies—not just the financial services sector. Measures in the Online Safety Bill look at online platforms, for example.

I apologise for interrupting, but all this would be a lot easier if we had the national fraud strategy. When can we expect it?