Compensation (London Capital & Finance plc and Fraud Compensation Fund) Bill — House of Lords, 2021-10-19
Topic: Domestic Commerce
James Younger (Conservative, Centre-right): My Lords, in the UK there is a wide range of opportunities for people to invest and help make a better future for themselves and their families. The Government’s role is to ensure that the system of regulation is suitably robust, so that individuals are treated fairly and have confidence in the financial system that they entrust with their hard-earned savings. While our regulators are working hard to minimise harm to consumers and pensioners, unfortunately, no system of regulation can completely eradicate the risk that firms fail, or that some bad actors, intent on committing fraud, slip through the net This Bill relates to two areas where it is necessary for the Government to step in to ensure a fair outcome for London Capital & Finance investors and victims of pension liberation fraud. This two-measure and two-clause Bill will provide the necessary powers for these two separate groups to receive the compensation they deserve. The first clause relates to a new government scheme to compensate London Capital & Finance bondholders who lost money after the firm entered administration in 2019. The second clause seeks to provide the Secretary of State for Work and Pensions the power to make a loan to the board of the Pension Protection Fund. The purpose of that loan is so the existing fraud compensation fund, which the Pension Protection Fund administers, has the necessary funds to continue to provide compensation to eligible pension schemes This Bill, which garnered widespread support in the other place, demonstrates that the Government will take action and step in when necessary. There are some important issues at stake. One, on which I am sure there will be considerable debate this afternoon, is the competence of the regulator. There is also the question of when and how the Government should step in to provide compensation. I would like to touch briefly on each of these issues and to provide some context for each of the measures and how they are intended to operate The House will be aware that the Government have committed to establishing a compensation scheme for investors in the failed mini-bond firm, so-called London Capital & Finance, or LCF. LCF was an FCA-authorised firm that sold unregulated non-transferable debt securities, commonly known as mini-bonds, to investors. Some 11,600 bondholders, many of whom had invested a significant portion of their savings, lost around £237 million when LCF went into administration in early 2019 Following the unprecedented scale of this collapse, the Economic Secretary directed the FCA to launch an independent investigation into the FCA’s regulation and supervision of LCF. Dame Elizabeth Gloster led the investigation, which concluded that the FCA did not effectively supervise and regulate LCF during the relevant period. Dame Elizabeth’s conclusions raise serious questions about the regulator’s approach to supervision and I would like to use my remarks later in this debate to provide some further detail on the plans they have in place to address her recommendations LCF’s business model was highly unusual both in its scale and structure. In particular, the firm was authorised by the FCA, despite generating no income from regulated activities. This allowed LCF’s unregulated activity of selling non-transferable debt securities, commonly known as mini-bonds, to benefit from the so-called halo effect of being issued by an authorised firm, helping LCF gain respectability among bondholders, many of whom were elderly. In response to regulatory failings detailed in Dame Elizabeth’s report, and the range of interconnected factors that led to losses for bondholders, the Government announced that they would establish a compensation scheme. The scheme will be available to all LCF bondholders who have not already received compensation from the Financial Services Compensation Scheme. It will provide 80% of bondholders’ principal investment up to a limit of £68,000, which represents 80% of the compensation they would have received had they been eligible for FSCS protection. Where bondholders have received interest payments from LCF or distributions from the administrators, Smith & Williamson, these will be deducted from the amount of compensation payable The Government expect to pay out around £120 million in compensation to around 8,800 bondholders in total, and have committed to ensuring that the scheme has made all payments within six months of the Bill securing Royal Assent. However, it is important to emphasise that the circumstances surrounding LCF are unique and exceptional, and the Government cannot and should not be expected to stand behind every failed investment firm. This would create the wrong incentives for individuals and an unacceptable burden on the taxpayer. Ultimately, investors must choose investments that are suitable for their risk tolerance and invest in high-risk, high-reward schemes only if they are prepared to lose the sum that they invested Government stepping in to provide compensation in response to regulatory failure or maladministration is unusual, but not entirely without precedent. Noble Lords will recall that the Government provided compensation to investors in Barlow Clowes, an investment scheme that failed in the 1980s, and in respect of Equitable Life. Like the LCF scheme, compensation was based on a percentage of investors’ losses Turning to the specifics of the Bill, the LCF measure is contained in Clause 1 and includes two key elements. First, it provides parliamentary authority for the Treasury to incur expenditure in relation to the scheme. Secondly, it makes a minor technical change which disapplies the FCA’s rule-making processes for the purposes of the LCF compensation scheme. The Treasury intends to use Part 15A of the Financial Services and Markets Act to require the Financial Services Compensation Scheme to administer the scheme on the Treasury’s behalf By disapplying FCA rule-making requirements, existing rules pertaining to the FSCS can be applied to the scheme without the need for the FCA to undertake a lengthy public consultation and impact assessment. This reflects the fact that the Government are fully funding the scheme and so there is no need to directly consult with FCA levy payers. It also avoids any unnecessary delays to compensation payments that such consultation would inevitably entail As I set out, this is a two-measure Bill, the second clause of which concerns loans to the board of the Pension Protection Fund. Clause 2 will amend the Pensions Act 2004, inserting a new section, which will give the Secretary of State for Work and Pensions the power to lend money to the board of the Pension Protection Fund, which manages the Fraud Compensation Fund. Pension savings are the largest financial asset for many people across the United Kingdom, for which they will save over the course of their working lives to provide for themselves in their retirement. That is why the Fraud Compensation Fund was established: to provide a safety net and pay compensation to occupational pension schemes which have lost out financially due to dishonesty When the Pension Protection Fund was set up in 2004, pension liberation fraud did not exist. This fraud involves members being persuaded to transfer their pension savings from legitimate to fraudulent schemes, with promises of high investment returns or access to a lump sum or loan from their pension scheme before the age of 55 without incurring a tax charge. It was not and could not have been envisaged for such schemes to be in scope for the Fraud Compensation Fund when it was established. Therefore, clarity was needed as to whether these schemes were eligible to receive compensation through the fund On 6 November 2020, the High Court found these pension liberation schemes to be in scope for compensation through the Fraud Compensation Fund, subject to meeting eligibility criteria. Since then, the Government and the Pension Protection Fund have worked rapidly to ensure that all those who have been victims of pension liberation schemes—an expected 8,806 people—are able to be compensated through the Fraud Compensation Fund One victim of this fraud is one victim too many. I reassure your Lordships that the Government are fully committed to working with regulators, the industry and enforcement agencies to protect people from pension scams perpetuated through transfers from one pension scheme to another, and to making it as hard as possible for criminals to carry out their malevolent intentions. It is estimated that the pension liberation fraud claims will exceed £350 million, far greater than the approximately £43 million currently held in the Fraud Compensation Fund. Therefore, there is a need for the Fraud Compensation Fund to have access to additional funding, and this Bill provides exactly that This Bill is necessary and important. It will ensure financial protection and fair outcomes for victims of pension liberation fraud. It will also provide some relief and closure for London Capital & Finance bondholders. I commend this Bill to the House and beg to move.