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The Financial Secretary to the Treasury (Mr. Stephen Timms): I very much welcome the fact that the hon. Member for South Norfolk (Mr. Bacon) has secured the debate, and congratulate him on doing so. He has written to me twice on this case and spoken to me informally about it. I am grateful to him for bringing to my attention what is clearly a very important issue. As he said, his constituents and others have lost substantial sums as a result of Michael Hart's activities, and I should like to express my sympathy to Mr. Hart's victims—both the five people in hon. Gentleman's constituency and all the others—for the dreadful distress that they have endured.
The hon. Gentleman accurately describes the fraud that was perpetrated, and as he said, Mr. Hart has since been convicted and is serving a six-year sentence for numerous counts of theft. The Financial Services Authority has been working closely with the firms concerned about how best to achieve compensation for the investors who have been affected.
The hon. Gentleman asks how it was that the banks and building societies involved were willing to pay cheques made out to them into Mr. Hart's personal accounts. A number of people would fairly raise that question. For completeness, in the unlikely event that they have not already done so, I point out that the hon. Gentleman's constituents should complain directly to the firm in question, but I imagine that they have already done so. If they are dissatisfied with the response that they receive, they can take their complaints to the independent financial ombudsman service. From what he says, that may well also have happened. If they are unhappy with the FSA's handling of the matter, they can complain to the FSA directly. He says that that has been done. If they are still dissatisfied, they can complain to the independent complaints commissioner. Of course, they can do so if they are dissatisfied about the time taken to determine their complaints, and I gather from what the hon. Gentleman says that that has been an issue in this case.
It is interesting to note what the Building Societies Association has said about the topic. It pointed out that the current practice is for many banks, building societies and other institutions to accept cheque deposits made by customers that are payable to the institution. It is
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estimated that 20 per cent. of all cheques deposited are made out as payable to financial institutions. That is a long-standing practice, and although it is clearly of little comfort to the hon. Gentleman's constituents, there have been only a handful of cases of theft of this kind in 150 years. I listened carefully to the good case that he made, but when he referred to a crisis in the cheque clearing system, I thought that he was somewhat overstating the position at which we have arrived. If depositing cheques in such a way was banned, there could be substantial inconvenience, and perhaps financial loss if people who were intended to receive payment were not able to do so.
The FSA is in discussion with the banking industry to identify the scale of the risks relating to the handling of cheques made payable simply to banks or building societies and what can be done to reduce the chances of future fraud of this kind. I await the outcome of those discussions with great interest and hope that they will not be long delayed. The hon. Gentleman referred to the amount of time that has passed, and I agree with him that it is clearly important, from everyone's point of view, that such fraud should not be repeated elsewhere.
Some steps have already been taken. The new edition of the banking code, which was published last month, gives clearer advice to customers about how to reduce the risk of fraud when making out cheques payable to banks and building societies. It might be worth reading to the House what the new edition says at paragraph 12.6:
"When you write a cheque, it will help to prevent fraud if you clearly write the name of the person you are paying the cheque to and put extra information about them on the cheque especially if you are not personally paying a cheque in (for example, because you are sending a cheque by post)."
"If you are making a cheque payable to a bank or building society, do not make the cheque payable simply to that organisation. Add further details in the payee line (for example XYZ Bank, re J Jones, account number xxxxxx). You should draw a line through unused space on the cheque so unauthorised people cannot add extra numbers or names."
I hope that the new guidance will be widely publicised and that cheque users will heed it. It is clearly of little comfort to Michael Hart's victims, because they have already been victims of fraud, but its observance will make it much less likely that others will be defrauded in the same way in the future. I welcome the change to the banking code and hope that other effective and proportionate ways can be found to reduce the risks of future fraud.
Mr. Bacon: If there is new guidance that is clear, it is obviously welcome. However, none of that alters the fact that the APACS definitive guide to cheques and the UK clearing system states:
That is the guidance now. The Financial Secretary must accept that when people are asked to write a cheque to a financial institution rather than to Michael Hart, for example, they think that that means something.
Mr. Timms:
As I say, I understand that 20 per cent. of cheques are made payable to a financial institution. The long-standing practice has been to permit them to be
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treated in the way in which they were treated in this case. I certainly hope that the guidance will be widely publicised so that people appreciate the steps that they can take to protect themselves from a recurrence of the problem.
I think that the banking code works well. The Treasury Committee has made the point that
We should look primarily to the banking code as the vehicle for addressing the issue, although I recognise that it is important to improve the protection that consumers may enjoy.
Mr. Bacon: I accept that the practice is long-standing, but it is directly contrary to the APACS definitive guide. If the practice is leaving people exposed in such a way, perhaps the Treasury and the FSA should get together to review the entire system to ensure that the problem simply cannot arise. I am trying to make the point that when people write a cheque payable to an institution, they think that a safeguard is being rendered to them that would otherwise not exist. They are thus being misled.
Mr. Timms: The issue is the interpretation of the guidance quoted, and in practice it has been interpreted in the way that I described. Hopefully, the new guidance will make it clear to people what they need to do to ensure that they enjoy the protection that, according to the hon. Gentleman, they have always believed that they enjoyed when writing out a cheque in the name of a financial institution.
Let me say a few words about the more general problem of cheque fraud, which we are determined to tackle. We have established a specific policing unit—the dedicated cheque and plastic crime unit—that works closely with the banking industry to reduce card and cheque fraud, using intelligence provided largely by the industry. In addition, since April last year the Home Office has provided additional funds to enable the City of London police to expand its fraud squad. The Home Office and the Corporation of London each contributed £l million in the last financial year, and the Home Office has also provided capital start-up costs. That significant addition to resources for the fight against fraud will enable the City of London police to take a lead role in that fight, and not just in the square mile.
I understand that one of institutions involved in this case—Abbey, of which the hon. Gentleman was very critical—has said that if, after the legal channels have been exhausted, the investors have still not been fully refunded, it would be happy to offer an ex gratia payment, so that no one who thought that they were buying an Abbey product will be financially out of pocket. I welcome that reassurance, which it is important to put on the record. In the case of another of the institutions involved, I am told that the making of such a payment might be conditional on the FSA's agreeing to undertake an investigation of Lucas Fettes. It is not clear to me that that is an appropriate stipulation to impose. As a matter of policy and because of the confidentiality requirements imposed by section 348 of the Financial Services and Markets Act 2000, the FSA does not normally make public whether it is investigating a particular matter, or, necessarily, the
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findings or conclusions of an investigation. Of course, if the investigation leads to enforcement action, the FSA will publicise it, as happened in the earlier Abbey case to which the hon. Gentleman referred.
I understand that the FSA has considered the circumstances carefully in the light of the criteria published in its enforcement manual, and it has concluded that it is unable to state whether it is investigating this particular firm; for the same reason I, too, have not been informed. The FSA has, for very good reasons, genuine operational independence from the Government, and I note in the light of the Conservative party's recent policy statement on financial services regulation that there is agreement across the House on the value of independence for the regulatory agency.
To protect investors, the 2000 Act established the financial services compensation scheme in order to act as a safety net and fund of last resort for consumers and small business customers of FSA-regulated financial services firms that are unable, or likely to be unable, to pay claims against them because they have gone out of business or are insolvent. The 2000 Act also established the single financial ombudsman service to adjudicate over customers' complaints against regulated firms. As I set out in my letter to the hon. Gentleman, the FSA is accountable to Parliament, Ministers, consumers and the industry via a number of mechanisms. They include the independent complaints commissioner, who investigates complaints against the FSA; an independent tribunal, which reviews the FSA's regulatory decisions; the requirement for the FSA to submit an annual report to the Treasury on the discharge of its functions; the Government's power to appoint and dismiss the FSA chairman and board; and the independent consumer and practitioner panels, which advise on and represent consumer and industry concerns to the FSA.
I think that the balance is now about right. I note that the shadow Chancellor called last week for consumer protection to be provided in the "least burdensome manner possible". It is right to look to the banking code in particular as a way forward and a means of addressing the problem that the hon. Gentleman has properly drawn to our attention. That would be preferable to introducing new regulations.
I commend the vigour with which the hon. Gentleman has pursued this case and I want to assure him and his constituents—and indeed others rightly concerned about the matter—of the very high seriousness with which the Government regard these issues. The industry also needs to recognise the seriousness with which the House is viewing the matter.
I have no doubt that the hon. Gentleman will, like me, look forward to the outcome of the FSA's talks with the industry, which I hope will reach a conclusion sooner rather than later. I have asked Treasury officials to keep me abreast of progress in those discussions and I hope that their outcome will provide all of us with grounds for optimism that the dreadful experiences suffered by the victims of Michael Hart will not be experienced by others in the future.
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